Freedom Line Blog

Regular readers know that Paul Krugman, Tom Friedman, and Joe Klein regularly jockey for the status of political pundit I most despise. Well, Dr. Krugman pulled into the lead with his stunning endorsement of “death panels” as the royal road to America’s fiscal health on yesterday’s edition of “This Week with Christiane Amanpour”:

H/T: NewsBusters

The Wall Street Journal is among the news sources carrying coverage of the preliminary recommendations being produced by President Obama’s much-feted debt reduction panel. According to the Journal’s synopsis:

Among the controversial proposals, the plan in its current form would end or cap a wide range of breaks relied on by the middle class, including the deduction for home-mortgage interest. It would tax capital gains and dividends at the higher rates now levied on wage income. To compensate, one version of the plan would dramatically lower and simplify individual rates, to 9%, 15% and 24%.

For businesses, the plan would significantly lower the corporate tax rate—from a current top rate of 35% to as low as 26%—but also eliminate a number of deductions. It would make permanent the research and development tax credit. Overall, the plan would cut the federal deficit by $3.8 trillion by 2020.

… On Social Security, the plan would gradually raise the retirement age to 68 around 2050 and 69 by 2075. It would combine a cut in benefits with a rise in taxes on wealthier people’s incomes. It would also seek to rein in federal spending on health care beyond what’s called for in the recently passed health-care overhaul. This would be achieved by introducing further changes, including reform of medical-malpractice law, and by seeking to slow the growth of the Medicare program.

The plan would make significant cuts on spending over which Congress has direct control, beyond entitlements such as Medicare. It identifies $410 billion in discretionary spending cuts by 2015. It proposes cutting the federal work force 10%, at a further savings of $13.2 billion by 2015.

Congressional earmarks—provisions inserted into legislation for lawmakers’ pet projects—would be banned permanently, saving $16 billion.

This a surprisingly market-friendly recommendation, much of which — though politically very tough — is admirable. Hopefully, low-tax advocates will train their fire on the unnecessary increases in capital gains and dividend rates, as well as what looks to be a proposed increase on Social Security and Medicare taxes for the wealthy. While we don’t know what deductions are on the chopping block, if the home mortgage example is representative there’s actually a strong free-market case to be made in favor of the eliminations. By giving economic preference to activities like home purchases, these deductions lead to economic inefficiency (they either direct consumers to make choices that wouldn’t be rational without the deduction or subsidize purchases that would have been made regardless).

Elsewhere in the WSJ piece, the authors refer to the fact that the current recommendations rely about 75 percent on spending cuts and 25 percent on tax increases. Good, but not great. A recognition that taxes always hamper economic activity means that tax increases should never be considered instead of spending cuts unless (A) government is only doing the things that are its rightful responsibility and (b) it is doing all those things at maximum efficiency. At some point, the exigencies of politics may require compromising short of that ideal, but I’d like to see a comprehensive examination of spending in the executive branch before tax hikes are even considered.

Let’s consider the cabinet departments. The Departments of Justice, Defense, Treasury, and State are the originals and unquestionably justified under our scheme of federal government. There are others that have probably grown into necessary organs in years since. We’ll need Health and Human Services as long as we have a federal welfare state, Interior as long as we have public lands and a National Park system, Transportation at least for the interstate highway system and air travel and, though its probably in need of some pruning, Homeland Security. Veterans Affairs seems like it could be folded into either Defense or HHS. As for the Departments of Education, Housing & Urban Development, Energy, Agriculture, Commerce, and Labor (apart from its statistical work), I’m at a loss for what useful purpose (or more importantly, results) justifies their existence. I’d be more than willing to scrap each of them, keep the few parts we still need, and re-check the ledger before considering higher taxes for even a single American.

If getting a House chairmanship were as automatic as moving from ranking member of the minority to chairman of the majority, then Representatives Ron Paul (R-TX) and Paul Ryan (R-WI) would be resting easy today.  Rep. Paul is the ranking Republican on the subcommittee with oversight responsibility of the Federal Reserve, a role the Austrian economist would relish.  For his part, Rep. Ryan is the ranking Republican on the powerful Budget Committee, the body empowered to make significant changes in public policy through the budget writing process.

Both men have reason to doubt an unchallenged assent to power because both are on record with radical plans to shrink the size of government.  Paul is sure to refile legislation to audit the Fed, a proposition that may gain popularity with the Fed’s announcement to add nearly $1 trillion to the national debt.  For his part, Ryan’s Roadmap to America’s Future is a comprehensive vehicle for delivering sustainable government programs that leave room for entrepreneurship and growth.

Voters had their say on Tuesday.  Now, it’s time to see how many fiscal conservatives in the newly enlarged GOP caucus are willing to elevate two of the most ardent foes of big government to consequential leadership positions.

If America continues to be a sober nation, there will be a time a few decades from now when Paul Krugman’s economic hypochondria will be viewed with the same sneering contempt as Paul Ehrlich’s crazed claims that hundreds of millions would die from famine in the 1970s and 1980s or the fears of the rise of Japan that dominated public discourse in the late 1980s and early 1990s (the old empire’s economic lost decade intervened).

On his blog at the New York Times today, Krugman frets aloud (his muscle memory prevents him from doing otherwise) that Americans may tank the economy by attempting to pay down their unsustainable levels of debt (further proof that Keynesianism is the economist’s version of a drunken weekend in Vegas). But the big story here is buried in the complaint that undergirds his thesis:

So what will happen? In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt; that’s how World War II cured the depression. Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies, which ends up reducing overall debt.

Hang on a tick. World War II? Hasn’t Krugman spent the past two years using every inch of column space available to him to advocate that President Obama embrace aggressive neo-Rooseveltism? But now it’s the war — not the New Deal — that ended the Depression? We know that Krugman is a specialist in non-falsifiable theories (if only the stimulus had been bigger …), but if the eight years that FDR had set aside for “bold, persistent experimentation” prior to Pearl Harbor weren’t sufficient to heal the nation’s markets, maybe that was a sign that the problem was strategic and not tactical. Maybe the Sage of Hyde Park should have taken some pointers from the benighted Warren Harding.

This is all a bit shocking coming from a Nobel Laureate. After all, if Paul Krugman doesn’t speak with authority on economics … then maybe Barack Obama doesn’t speak with authority about peace.

After being called back to Washington, D.C. from Congress’ August recess by Speaker Nancy Pelosi, the House of Representatives yesterday passed a $26 billion “jobs bill” that is in large part a bailout for teachers unions. 

Prior to the vote, Congressman Tom McClintock (R-CA) summed up what the House was up to during a must-read floor speech:

Mr. Speaker:  Many people are asking why Congress is here today.  I think the answer’s pretty simple: we’re not bankrupting the country fast enough and so we need to come back and spend more.

In the merciful week that Congress was not in session, my constituents had one message: STOP THE SPENDING.  Obviously, Congress isn’t listening.

Over the past two years, this administration and this Congress have increased spending by nearly 18 percent and run up more debt in two years than the irresponsible Bush administration did in all of its eight years combined.  Meanwhile, unemployment has increased from 7.6 to 9.5 percent.  Yet the problem in the view of House Democrats is that we just haven’t spent enough.   So we gather here today to shovel another $26 billion at the problem. …

Mr. Speaker, with the nation now some 13.2 trillion in debt – 93 percent of the entire economy – it is time to invoke the first law of holes: when you’re in one – stop digging.  And if Congress doesn’t invoke that law now, I can all but guarantee you the American people will invoke it in November.

Read and watch Rep. McClintock’s entire floor speech here.

It gets a little tiresome having to read columnist Fareed Zakaria’s senate floor speeches masquerading as opinion pieces in Newsweek every seven days. Dr. Z has a tendency to write columns with grandiose titles such as “How to Salvage Afghanistan” and “Defusing the Debt Bomb”.  While it’s admirable that he’s at least trying to offer solutions, most of Zakaria’s bigthink is pretty small — conventional Washington wisdom masquerading as divine revelation.

Zakaria’s gift for analysis is not nearly as deep as he thinks and nothing proves it more than his new piece in Newsweek, entitled “Raise My Taxes, Mr. President”. Taking a page out of the Obama playbook and fashioning himself a centrist who can rise above the fray, Zakaria writes:

[The Bush tax] cuts are set to expire this year. The Republicans say they want to keep them all, even for those making more than $250,000 a year (less than 3 percent of Americans). They say that higher taxes will hurt the recovery. But for months now they have been arguing that the chief threat to the economy is our gargantuan debt and deficit. That’s what’s scaring consumers, creditors, and businesses. Given a chance to address those fears by getting serious about deficit reduction, though, they run away.

Fareed is making a mistake that should be recognizable to anybody who’s ever watched an episode of “House”. He’s making a diagnosis based on symptoms rather than an underlying cause. Yes, America’s debt is horrible. But let’s keep one of Milton Friedman’s key insights in mind: all spending is a form of taxation — it has to be paid for sooner or later, one way or another.

Balancing the budget through tax increases only moves the government’s burden on the private sector from debt to taxation. Think of it this way: if you want to get your personal finances in order, does it make more sense to simply pay for your reckless spending with cash instead of a credit card or to actually buckle down and stop spending as much? If you realize that the first can save you a few bucks here and there, but only the second can provide financial salvation, you’re on the right track. You’re also smarter than Fareed Zakaria.

Below is one of the latest cartoons from Pulitzer Prize-winner Michael Ramirez.

View more of Michael Ramirez’s cartoons on CFIF’s website here.

With apologies to John Derbyshire, that’s the conclusion it’s difficult to avoid reading the latest from Derb’s National Review colleague, Kevin Williamson. In a piece entitled “The Other National Debt“, Williamson looks at all of the extra liabilities that don’t make their way into the conventional tally of a $14 trillion national debt. His conclusions are hair-raising.

On state and local debt:

Beyond the official federal debt, there is another $2.5 trillion or so in state and local debt, according to Federal Reserve figures. Why so much? A lot of that debt comes from spending that is extraordinarily stupid and wasteful, even by government standards. Because state and local authorities can issue tax-free securities — municipal bonds — there’s a lot of appetite for their debt on the marketplace, and a whole platoon of local special-interest hustlers looking to get a piece. This results in a lot of misallocated capital: By shacking up with your local economic-development authority, you can build yourself a new major-league sports stadium with tax-free bonds, but you have to use old-fashioned financing, with no tax benefits, if you want to build a factory — which is to say, you can use tax-free municipal bonds to help create jobs, so long as those jobs are selling hot dogs to sports fans.

On exploding public pensions:

States aren’t going to be able to make up those pension shortfalls out of general tax revenue, at least not at current levels of taxation. In Ohio, for instance, the benefit payments in 2031 would total 55 percent of projected 2031 tax revenues. For most states, pension payments will total more than a quarter of all tax revenues in the years after they run out of money. Most of those pensions cannot be modified: Illinois, for instance, has a constitutional provision that prevents reducing them. Unless there is a radical restructuring of these programs, and soon, states will either have to subsidize their pension systems with onerous new taxes or seek a bailout from Washington.

And — the death shot — entitlements:

The debt numbers start to get really hairy when you add in liabilities under Social Security and Medicare— in other words, when you account for the present value of those future payments in the same way that businesses have to account for the obligations they incur. Start with the entitlements and those numbers get run-for-the-hills ugly in a hurry: a combined $106 trillion in liabilities for Social Security and Medicare, or more than five times the total federal, state, and local debt we’ve totaled up so far. In real terms, what that means is that we’d need $106 trillion in real, investable capital, earning 6 percent a year, on hand, today, to meet the obligations we have under those entitlement programs. For perspective, that’s about twice the total private net worth of the United States. (A little more, in fact.)

These numbers underscore the need for real change, quickly advanced. Keep your eyes fixed to CFIF, where we’ll soon be unveiling a campaign to corral the runaway spending.

Below is one of the latest cartoons from Pulitzer Prize-winner Michael Ramirez.

This was Barack Obama’s official campaign website on September 9, 2008:

Today, we learned that Washington has run up a record budget deficit of $407 billion this year…  Obama will bring real change by cutting taxes for middle-class families and small businesses, paying for all his proposals to reduce the deficit, and will put America on a path towards fiscal responsibility and a stronger economy.”

Pretty bold stuff.  Reasonable minds knew then that an Obama victory would only exacerbate the nation’s deficit, even if the fawning mainstream media was refusing to press him on tough questions.  But even skeptics didn’t foresee just how bad and how rapidly he would do so.  Today, we received sobering news that the national debt surpassed the $13 trillion mark overnight.  That’s now $42,000 per American citizen, and $118,000 per American taxpayer.

And that $407 billion deficit that Obama cavalierly promised to reduce in September 2008?  He’s now raised it from $400 billion to $1.4 trillion.

That’s the type of change for which only America’s enemies could have hoped.

Today, the Senate  voted to expand the U.S. debt limit to a record $14.3 trillion, or more than our total economic output last year.  We will soon spend more than we produce.

Here is the roll call vote.  No Republican voted for the measure.

The following was distributed to all Senate offices today:

Key Vote Alert: H. J. Res. 45, the Coburn Rescission Amendment

Center for Individual Freedom Urges All Senators to Vote “Yes” on the Coburn Rescission Amendment

On behalf of its 250,000 activists and supporters nationwide, the Center for Individual Freedom (CFIF) urges all Senators to vote “Yes” on the Coburn amendment to H. J. Res. 45, the statutory debt limit increase.

CFIF supports numerous aspects of the amendment, including the more than $120 billion in federal spending reductions through the consolidation of duplicative government programs.

For example, the federal government currently has over 20 programs dedicated to reducing obesity. Because President Obama has pledge to “eliminate wasteful redundancy” in our federal budget, all Senators should support the Coburn amendment to reduce the nation’s bloated budget.

As the Senate considers yet another $1.9 trillion increase to our national debt, it only makes sense that our political leaders should take some strides toward reducing wasteful and duplicative spending. The Coburn amendment is one of many steps needed to reduce our staggering national debt.

For these reasons and more, CFIF urges all Senators to vote “Yes” on the Coburn amendment. Moreover, CFIF also opposes the $1.9 trillion debt limit increase and calls on Congress to further cut spending rather than recklessly add to the nation’s out-of-control debt.

Update: The Coburn amendment was defeated by a 37-57 vote.

The White House has made the decision that debt, all $12 trillion worth of it, no longer matters in America.  Instead of attempting to lower the $1.4 trillion annual budget deficit, the White House is looking for another round of stimulus pork.

According to White House Economic Advisor Christina Romer, it would be “suicide” to focus on deficit reduction to the exclusion of “job creation.”  Her solution, of course, is to repeat the past two/three failed stimulus bills and spend another $50 billion on infrastructure.   In Washington, D.C. that means $5 billion on infrastructure and $45 billion on pork and other preferred government handouts.

Romer’s solution is odd considering this paper she authored with her husband in April (after she began working at the White House) that concluded each dollar of tax cuts historically raised Gross Domestic Product (GDP) by $3, greater than many similar estimates of government stimulus spending.

Romer also concluded that tax increases can easily lower GDP.  As she wrote, “Our results indicate that tax changes have very large effects on output.  Our baseline specification implies than an exogenous tax increase of 1% of GDP lowers real GDP by almost 3%.”  There appears to be a big difference between Doctor of Economics Romer and White House employee Romer.

With all this knowledge about the virtues of tax cuts and the harm of tax increases, Dr. Romer should pay a visit to the West Wing occasionally and remind President Obama that his policies will continue to shrink GDP and impede job creation.