If we can avoid the broad brush caricature of the Tea Party that the Tea Party wants a smaller government regardless of the consequences and the Progressives have never seen a large Federal or state spending program that they did not like, I can see some common ground between the two groups. Yesterday I got a copy of The Forgotten Man and it reminded me of the dual meaning of this title. For Progressives they feel their programs are protecting the forgotten man while the Tea Party folks think they are the forgotten man. Another area where they share common ground is their disgust in the performance of the President.
Politics
Ohio Farmer II
This is the second installment of the Ohio Famer series. The form and voice of this post is to pay homage to a group of citizens who early in our country’s life engaged in passionate yet civil debates about the best form of government for our new country. They argued their case for the best form of government via letters to the local newspapers. These letters came to be known as the Anti- Federalist papers.
In my last letter, Ohio Farmer I, I discussed the inevitability of austerity measures at the local, state, and federal levels. In this letter I will document what I believe are the underpinnings of this crisis and how we might go back and embrace some of the concepts of our Anti-Federalists as way to move forward to sustainable government.
In the Anti-Federalist paper, Federal Farmer I, the author included a quote from Alexander Pope that underlines the pragmatic nature that even Anti-Federalist people viewed their government.
For Forms of Government let fools contest; whatever is best administered is best.
So although an Anti-Federalist like the Federal Farmer would naturally like to see limited federal powers, he also wanted to see a more effective government than the Articles of Confederation was allowing. The grand compromise was to create a federal government with limited powers and all other powers were to remain with the people. It took almost no time for Congress and the judicial system to start chipping away at the concept of limited Federal powers. Initially the efforts by Congress to expand their legislative power were hampered because they had to show to the courts that a restriction of liberty was reasonable. Finally in the 1930s, the Supreme Court forever changed the concept of liberties residing with the people and began limiting when it was necessary for the government to justify to a court its restrictions on the liberties of the people. In 1955 the Warren Court made the presumption of constitutionality of laws duly enacted by Congress effectively irrebuttable. Although Randy Barnett argues in his paper, Scrutiny Land, for an alternative approach that is more case specific, the present situation is that our liberties have been transferred to Congress to do as they see fit with almost no opportunity to contest the constitutionality of the law. The big problem with the transfer of liberties is the transfer of power that goes with it. With the transfer of power from the citizen to the federal branch complete, it is not surprising that we find ourselves in a financial mess. The balance of power has shifted to the federal branch. If there was an Anti-Federalist alive today, they would immediately recognize our failures at fiscal prudence with Social Security, Medicare, Medicaid, and our national debt as the same problems they saw with the British government. They would undoubtedly remind us that the need for the citizen to keep their liberties is to save Congress from itself. The issue of liberty is not so much about possessing freedom as it is about reducing the opportunities for bad government. All of our entitlement programs are duly enacted laws and complete failures at fiscal responsibility. With this type of power Congress is born to fail. The only question is when is it going to happen. A Congress with more restrictions and less power has less opportunities for major social achievements. However if Congress plays by the rules, social achievements and good government are still a likely outcome and sustainable through recessions. That is a lot better than what we have right now.
As Eileen Norcross explains in her paper, Fiscal Evasion in State Budgeting, there is a wide range of “gimmicks” that loosely describes a range of
choices including school aid cuts, sales tax holidays, increased borrowing, delayed tax refunds, delayed payments to vendors, and pension deferrals. These same “gimmicks” are also used at city, county, and federal levels. Although she argues for more research we will undoubtedly need to stop using these “gimmicks” long before the research is completed. All of our governments have a desperate need for simplicity in financing so the executive branch and legislative branch can make good decisions.
As a path forward we should:
- Start banning many of the budget “gimmicks” as part of our austerity programs.
- Although it will be difficult for Congress to stomach, we need to set our entitlement programs apart from the political process. As an example Medicare should be reformed outside of health care reform and Medicaid. Social Security funds should not be an excuse to spend more money from our operating budget.
- Legislators should be prevented from attaching earmarks to these entitlement programs financing.
- Public service pension fund benefits should be voted on by referendum.
Ohio Farmer I
The form and voice of this post is to pay homage to a group of citizens who early in our country’s life engaged in passionate yet civil debates about the best form of government for our new country. They argued their case for the best form of government via letters to the local newspapers. These letters came to be known as the Anti- Federalist papers.
To the Editor of the Goshen Gazette,
Recently David Goldman at the Asia Times argued that banks would not allow a default by our city and state governments because of the impact of the defaults would have on the banks. In this article he said,
It’s not about the impact on the real economy (the attendant cut in public services and public employment), it’s about the effect that such defaults would have on the banks.
In fact, that’s a good rule of thumb. If it’s going to hurt the banks, it’s probably not going to be allowed to happen.
I agree with his point that the banks will try to do everything in their power to avoid having a city or state to fail however I do not see that they have a choice in the matter. In this crisis the issue of whether to provide municipal financing is a relatively minor issue. Across the country the voters have largely rejected tax increase proposals. This leaves our legislators without a choice, spending cuts are inevitable. The only questions that remain unanswered are what programs do we cut and by how much. Resolving this issue will undoubtedly be very messy.
An interesting irony in this crisis is my belief that our elected legislators are particularly ill-suited for the job at hand. When I was a young man there seemed to be a multitude of legislators from both parties who not only campaigned for a more efficient government but applied the political pressure to make government actually work better. As the years went by and our legislators continued to drink heavily from the “deficit spending” Kool-Aid, “deficit spending” went from a tool to stimulate an economy during a depression to a perpetual facet of our federal budget. Legislators from both parties paid lip service to balancing the budget but they made almost no effort to do anything about it. It was the next administration’s problem. Passing laws dependent on overly optimistic estimates of reduced spending became the norm and one of the many ways they could avoid voting on spending cuts. In fact almost all of the “spending cuts” over the last forty years have not actually cut spending but postponed the spending to later years. These legislators knew we would eventually have to pay for their lax budgeting practices but with a wink and a joke they hoped it would not occur during their term in office. We got away with these budget failures because we are the largest economy in the world and we were pretty effective competitor in the world market. However we might have reached our peak in the world market place and the willingness of foreign countries to finance our debt might have finally reached its limit. It looks like we have finally reached our budget doomsday and the best team we can put on the field is a group whose most redeeming quality is their inability and unwillingness to control spending.
The new twist to this crisis is that the budgeting illness that started at the federal level has mutated and infected our state and local governments. Three of our most important states, California, Illinois and New York, are for all practical purposes bankrupt. California paid their vendors in 2009 with IOUs. Despite the embarrassment of paying in IOUs the budget crisis is unresolved. Illinois has been paying their vendors late all year and the governor of New York vetoed 6900 bills to balance the budget. These states are not alone. There are 46 states with budget deficits. Not only do they share huge operating budget deficit problems but many states have a huge pension fund liability problem, too. To compound the budget deficit issue Medicaid costs are dominating the lion share of many state budgets. Without the 2009 stimulus money many states would have been forced to severely cut back Medicaid. Without additional federal money in 2011, many states will be forced to cut back on Medicaid. Some states have already decided that they have no choice but to cut back Medicaid. If the state tax revenue situation does not improve dramatically real soon, the state budget deficit issue will likely force at least one state into some form of “managed bankruptcy” within a year. This in turn might start a cascade of municipal failures. It could get pretty chaotic. Some legislators will work to manage the situation but it appears that many legislators would rather take their chances in bankruptcy then betray their constituencies. Although there might be some banks who have a good business reason to help the cities and states out, this is a life or death situation for politicians and constituencies. This situation may be too hot to handle for the banks.
It is my hope and prayers that we can find a group of legislators with the courage to put good government and budgeting over politics. Good government should always trump politics.
Here’s The Real Reason Cities And States Would Never Be Allowed To Default
Joe Weisenthal
Wed, 07 Jul 2010 17:49:48 GMT
Re: Pity the Poor Keynesians
A comment I made on the post, Pity the Poor Keynesians.
I work for a small business and our number one issue is that our sales are down from last year. The one strategy that has worked for us has been to reduce costs and become more efficient. This strategy appears to be a very common business strategy in 2010. Neither the latest stimulus or the previous stimulus during the Bush administration have shown any resemblance of increasing aggregate demand in areas that translate into increased sales for our business. Increased governmental spending during a recession as a way to stimulate the economy is a policy attributed to Keynes. At its core this policy depends on tricking the consumer to spend more. If the consumer goes along with the trick then each dollar spent by the government should result in several dollars of increased consumer spending. Unfortunately the consumer did not take the bait in 2008, 2009, or 2010. In this recession the Keynesian multiplier looks like it is yielding less one. In other words we got less than a dollar benefit for every dollar spent. This should not be surprising since most of the stimulus money was spent on government transfers payments rather than spending on infrastructure such as roads. Although the Keynesian economists claimed that spending on transfer payments should have the same effect as spending on infrastructure, the results for this economy seem to indicate otherwise. Considering that it has become cool to be frugal and pay down debts, it is unlikely that continued use of deficit spending to stimulate the economy will ever work with this group of consumers. This leaves our Keynesian supporters in a quandary about future spending plans to increase consumer spending and reminds me of this quote.
Insanity: doing the same thing over and over again and expecting different results.
Albert Einstein
Since the government plans are not working and our government doesn’t have a clue on how to fix the economy, businesses are left to deal with their problems in what ever way they can. Since businesses are facing a lot of operational, financial, and regulatory risks, it is likely that they will continue to focus on cost control and avoid making major commitments. That is not hard to figure out. There are so many risks out there right now it is unlikely you will hear them singing, “Happy days are here again!”, any time soon. What you saw from businesses in the first six months of 2010 is probably what you will see for the entire year. It is a given that there will be no jobs recovery in 2010. What may be unexpected is that the dropping business and consumer confidence is pointing to a stalled recovery scenario for 2011. Considering the budget deficits facing most of the states and the likelihood of a stalled economy, the economy is likely to get uglier in 2011 and 2012 rather than better.
Things that make me go hmm… What were they thinking?
From the New York Times we have this article that A.I.G. waived its right to sue the banks whose sh***y mortgages A.I.G was insuring as part of the bailout. Hey, why isn’t Senator Levin complaining about this deal?
Unknown outside of a few Wall Street legal departments, the A.I.G. waiver was released last month by the House Committee on Oversight and Government Reform amid 250,000 pages of largely undisclosed documents. The documents, reviewed by The New York Times, provide the most comprehensive public record of how the Federal Reserve Bank of New York and the Treasury Department orchestrated one of the biggest corporate bailouts in history.
The documents also indicate that regulators ignored recommendations from their own advisers to force the banks to accept losses on their A.I.G. deals and instead paid the banks in full for the contracts. That decision, say critics of the A.I.G. bailout, has cost taxpayers billions of extra dollars in payments to the banks. It also contrasts with the hard line the White House took in 2008 when it forced Chrysler’s lenders to take losses when the government bailed out the auto giant.
http://www.nytimes.com/2010/06/30/business/30aig.html
From the Foreign Policy blog we find out that the Russian spies were not charged with espionage since that offence requires them to be involved in transmitting information related to our national defense. For all practical purposes these “Russian spies” appear to be performing a job we normally attribute to political lobbyists or journalists. I suppose this episode speaks volumes about the Russian psyche that they used a covert operation to engage in political lobbying.
Things that make go hmm….
Here is a nice article from The Economist on the General McChrystal kerfuffle.
THE national security adviser of the world’s greatest superpower is a “clown”, its vice-president a nobody and its president “uncomfortable and intimidated”. With those words the officers around General Stanley McChrystal, the American commander in Afghanistan, engulfed America in a storm as damaging to its war effort as any Taliban raid. America rightly sets great store by civilian control of its armed forces and on June 23rd a distinctly unintimidated President Barack Obama made General McChrystal pay for his insubordination with his job. But presidential decisiveness cannot conceal a deeper truth. America and its allies are losing in Afghanistan.
http://www.economist.com/node/16432784?story_id=16432784&source=most_commented
Here is a nice article on some current macro-economic issues. The most prominent issue is can we spend our way out of a recession. The economists fall into two camps. On one hand the fans of John Maynard Keynes think we can increased government spending can stimulate our economy and will pay for itself by increased GDP and tax revenues. On the other hand the economists who are fans of Friedrich von Hayek and Ludwig von Mises warn that increased government spending inevitably fails to improve the situation beyond that which would have occurred during a normal recovery. A good argument was made by Amity Shlaes in her book, The Forgotten Man: A New History of The Great Depression, that increased government spending during the The Great Depression extended the problem. An interesting bit of trivia is that Friedrich Hayek’s 1944 book, Road to Serfdom, recently made #7 on the Amazon best seller list. Here is the cartoon version, http://mises.org/books/TRTS/. One of current economic questions that concerns our future is whether government spending on expanding welfare and unemployment benefits is better at stimulating job growth than spending on road construction and defense. Here is an excerpt on the Wall Street Journal view on the subject. Although I do not believe the “Keynesian multiplier” is negative, I suspect the multiplier is less than one. As Senator Levin might complain, “The stimulus was a sh***y deal”.
President Obama’s tragic mistake was to blow out the U.S. federal balance sheet on spending that has produced little bang for the buck. The fantastical Keynesian notion (the "multiplier") that $1 of spending produces $1.50 in growth was long ago demolished by Harvard’s Robert Barro, among others. That $1 in spending has to come from somewhere, which means in taxes or borrowing from productive parts of the private economy. Given that so much of the U.S. stimulus went for transfer payments such as Medicaid and unemployment insurance, the "multiplier" has almost certainly been negative.
My inner engineer has been painfully searching for the technical details of the BP spill disaster. For a disaster with so much publicity I find it amazing that the technical details of how the well failed and how the oil companies are implementing new safeguards to make sure it does not happen on any existing or proposed wells is not discussed by the media. In fact most of my links I collected on the subject over the last couple of weeks no longer work. The best source on the subject that I found is The Oil Drum. The administration has been remarkably quiet at justifying the drilling moratorium and almost no effort at getting ahead of this issue since it has a major economic effect on the Gulf states. So I was not surprised Judge Feldman’s decision. The interesting issue for me is how the BP spill was handled compared to how the FAA handles an airplane crash. I remember several times the FAA grounded planes for inspection and repairs. If you use the FAA as your benchmark there are some fundamental problems with the way the MMS and the administration handled this problem. You do not need to complete the review to start implementing new safeguards. If these new safeguards have already been implemented by the oil and the drilling companies, these companies need to start re-establishing public confidence long before the MMS and the administration gets their act together.
Here is another interesting article about rising tax rates. I know several Democratic pundits have argued that we are the most under-taxed people but my gut and my checking account agrees with this article.
Here’s why: taxes are already rising to record levels, with or without legislative changes. It’s not clear why they should rise further, as Hoyer urges.
“If tax increases of this magnitude were proposed explicitly, there’s little chance they could pass Congress.”
As I argued in the Wall Street Journal in 2008, the income tax code is inadequately indexed for the growth of incomes. The income tax brackets””the dollar amounts that designate the tax rates that apply to an individual’s income””are indexed only for inflation, while incomes tend to rise about 1 percent faster than inflation each year. The result is that a greater and greater share of individuals’ incomes will fall into higher tax brackets, increasing taxes even if the formal tax rates remain the same.
The effects of this are larger than you’d think. According to Congressional Budget Office (CBO) data, individual income tax receipts averaged 8.15 percent of Gross Domestic Product from 1953 through 2008. Due to the recession, this year they’re projected to equal around 8 percent of GDP.
The Deadly Embrace – The Goldman Sachs/SEC Affair
I find the Goldman Sachs/SEC affair to be an intriguing affair. In a very public display the SEC alleges Goldman Sachs of fraud. Here are some of the more interesting facts I have collected so far:
- Although the information released by the SEC is impressive the SEC opts for a civil fraud case.
- Despite lots of former Goldman Sachs employees in the Obama administration and large Democratic campaign contributions, Goldman Sachs is blind sided by the announcement.
- Steve Liesman of CNBC appears to have identified significant exculpatory information in SEC testimony that weakens the SEC case.
- The primary victim of the fraud case is a German bank, IKB. The Business Insider highlights the facts that this bank thought they were an expert in the CDO market. From 2000 this bank had been successfully selling these risky investments to its clients. In a trial currently underway in Germany, IKB’s former chief executive Stefan Ortseifen, stands accused of misleading investors about the perilous state of IKB’s finances in the summer of 2007.
What was the SEC doing?
The SEC was arguably asleep at the wheel in both the Madoff scandal and the Stanford scandal. This week we find out that the SEC had an attorney who spent most of the day watching porn. For an organization that is bereft of positive publicity, this news story should have been a shining light of good government in action. However, this story seems to have avoided the high road, too.
- As Ben Stein remarked on a recent Wealthtrack episode, the SEC has all of the laws it needs to prosecute fraud as a criminal case. Yet the SEC chose to pursue a civil case. Shouldn’t it be IKB pursuing the civil fraud case?
- The timing of the SEC disclosures appears to be politically motivated. A finance reform bill is pending in the Senate and these disclosures and the subsequent public outrage appear to be a political gambit designed to raise political pressure on the bill’s opponents and to expedite the bill’s passage.
- As the Washington Post and Rush Limbaugh pointed out, The White House appears to have successfully used “insider information” on the Goldman Sachs news release to raise campaign contributions via targeted web searches.
My theory is that Goldman Sachs and the SEC are involved in a deadly embrace. Despite this being a lose-lose proposition, I am afraid they won’t settle any time soon. Although the Democratic pundits will claim a major victory when the Senate passes the finance reform bill, there is bad blood brewing on Wall Street over the handling of this affair. I doubt the voter cares too much about a civil fraud case involving a German bank heavily involved in speculating on US real estate.
Ideas for an essay called Ohio Farmer I
For the last two weeks I have been listening to the Anti-Federalist Papers from www.audioowl.com on the way home from work and during my walks. I had been curious about the constitutionality questions raised by the Health Care Reform bill. My gut was telling me that the constitutional implications from the insurance mandate would have caused a serious fight amongst our founding fathers. I was amazed and entertained by their arguments against expanded Federal powers. Like Cato Institute I feel I should make an attempt to pay homage to their letters with an essay. Since I am technically a farmer in the state of Ohio my essay will be titled, “Ohio Farmer I”. Here are some of my ideas for the essay.
- I suspect that the Anti-Federalists would take great offence at this extension of federal power. As a core belief they believed that the Federal government must necessarily have limited powers to avoid the inevitable devolution into a despotic or dysfunctional government.
- I suspect that the Anti-Federalists would laugh out loud at the willingness of the Supreme Court to enable and encourage increase Federal power grabs by Congress through the legal concept of “double deference”. It is an interesting question whether they would be more repulsed by the power grab by Congress or the willingness of the Supreme Court to look the other way. Randy Barnett discusses this concept of “double deference” on The Volokh Conspiracy and in the Scrutiny Land article.
- I suspect that they would look at the history of these Federal power grabs as inevitably leading to a dysfunctional form of governing that is neither responsible to the people or to the original goals of the legislation. They would see our entitlement crisis as the natural result of a fundamentally flawed approach to governing and budgeting. I doubt they would be able to grasp the size of our budget deficit and the thought process that justified it.
- Finally I suspect that the Anti-Federalists whose ultimate desire was to form a more perfect form of government would have some recommendations to restore balance amongst the branches of government and to reduce these huge intractable political problems with entitlements into much smaller political problems that are much easier to solve.
As the Screw Turns
This week I found interesting relationships between seemingly unrelated events.
- As Senator Bunning tried to make his case that now is the time to start cleaning up the debt crisis, he was pilloried by Republicans, Democrats, and the press for being heartless to the unemployed. It was during these discussions I came to the conclusion that unemployment insurance is more like triage rather than part of a larger solution for unemployment. The question of whether to extend unemployment insurance seems to be most closely related to the prevailing political winds at the time. At this time the political winds are to extend unemployment. Several people showed that the unemployment figures remain mostly unchanged at the beginning and at the end of the unemployment insurance extensions. So the plan is we spend a lot of money to kick the can down the road.
- Greece passed an austerity budget and there were strikes and rioting, Clashes in Athens as Greek PM seeks EU debt help (AP). By the end of the week it looked like the Greek population is finally coming to grips with the reality that budget cuts are inevitable.
- I ran across an intriguing slide presentation, “The Nightmare Scenario: How The U.S. Government Would Look Under An Austerity Budget”, on The Business Insider. This presentation uses the Irish austerity measures as the template.
- There was a referendum in Iceland to repay Britain and the Netherlands for a failed Icelandic bank, Icelanders balk at Icesave deal, 93.3% vote ‘no’ (AFP). It appears that Icelandic population do not feel obligated to pay for the mistakes of others.
- Barney frank threw a scare into the mortgage backed securities markets when he casually “noted that debt issued by the two mortgage finance companies is different from bonds issued by the Treasury Department” . This evidently caused a panic among investors. On Friday the Treasury Department was forced to reiterate their financial support for Fannie Mae and Freddie Mac.
- Finally we see that Rick Perry Wins Heated Texas GOP Primary. Populism is alive and well in Texas as he said , "From Driftwood, Texas, to Washington, D.C. we are sending you a message tonight: Stop messing with Texas!".
- Although I doubt the Democrats will not agree, the Instapundit is wondering if our economy has gone beyond the triage stage, HAS OBAMA DONE IRREVERSIBLE DAMAGE YET? Neo-Neocon says “yes.” I’d say it depends….
Although I doubt the United States will install an austerity budget as severe as Ireland, I think it is inevitable that some states and cities will balance their budgets with “Irish”-like budget cuts. Extreme situations will require extreme solutions. Eventually a federal austerity budget will become inevitable because entitlement cuts are intractable political issues. As shown in California neither party was willing to cut the budget until they are forced to do something embarrassing like issuing IOUs. I think that the wise men and women in Washington will try and put a muzzle on Barney Frank to avoid an Icelandic-type public opinion blow up the mortgage market before it has a chance of recovering.
Senator Bunning’s Unappreciated Gifts
Up until Senator Bunning’s actions our legislators seemed to be acting more like the parents of an addicted child. Parents initially hope they can buy their way out of their child’s problem. Eventually they realize the compassionate solution is tough love. I suspect that Senator Bunning’s actions reflect this thinking and that there is probably wide spread support for our legislators to stop the shell game style financing schemes. It is time for our legislators to embrace tough love.
By Alan Reynolds
Sen. Jim Bunning (R., Ky.) blocked “extended” unemployment benefits beyond their scheduled expiration on February 27. That thwarted bill would also have put off, again, a scheduled 21 percent cut in Medicare payments to physicians. Democrats were outraged. But why?
Bunning just wanted to use leftover “stimulus” money to pay for the benefits. Why not? Such transfer payments accounted for over 80 percent of stimulus spending last year.
Besides, as Federal Reserve policymakers noted, the evidence is overwhelming (see here and here) that extending unemployment benefits from six months to nearly two years has raised the unemployment rate by a percentage point or two. I’ve waited since 1991 for someone to prove I’m wrong about that. Nobody has, because nobody can.
If the maximum duration of jobless benefits were trimmed by 13 to 20 weeks (which is all that’s at stake), they would still be far more extended than ever before. But the unemployment rate by the time of this November’s elections would be much lower than otherwise. Would Democrats prefer to go into the elections with an unemployment rate near 10 percent or a rate below 9 percent?
As for Medicare, slashing payments to physicians is the Democrats’ favorite way of paying for expanding Medicaid enrollment and health-insurance subsidies for the non-poor. If they really think that will work, how can they possibly object to saving money sooner rather than later?
[Cross-posted at The Corner]
Senator Bunning’s Unappreciated Gifts
Alan Reynolds
Sat, 27 Feb 2010 22:39:00 GMT