Category Archives: Fiscal Policy

Quote of the Day: Wet Blanket Edition

President Obama and his sycophant Keynesian friends in the MSM can’t quite figure out why his policies haven’t improved the economy. Maybe President Obama should listen to an actual job creator, Steve Wynn to get some clue about why businesses aren’t expanding.

Here is an excerpt from Wynn from a recent conference call where he describes Obama’s policies as “the greatest wet blanket to business, and progress and job creation in my lifetime.”

[Partial transcript, Wynn responding to a question during the Q&A portion of the conference call]

“Well, here’s our problem. There are a host of opportunities for expansion in Las Vegas, a host of opportunities to create tens of thousands of jobs in Las Vegas. I know that I could do 10,000 more myself and according to the Chamber of Commerce and the Visitors Convention Bureau, if we hired 10,000 employees, it would create another 20,000 additional jobs for a grand total of 30,000 […] And I’m saying it bluntly, that this administration is the greatest wet blanket to business, and progress and job creation in my lifetime. And I can prove it and I could spend the next 3 hours giving you examples of all of us in this market place that are frightened to death about all the new regulations, our healthcare costs escalate, regulations coming from left and right. A President that seems — that keeps using that word redistribution. Well, my customers and the companies that provide the vitality for the hospitality and restaurant industry, in the United States of America, they are frightened of this administration. And it makes you slow down and not invest your money. Everybody complains about how much money is on the side in America. You bet. And until we change the tempo and the conversation from Washington, it’s not going to change. And those of us who have business opportunities and the capital to do it are going to sit in fear of the President. And a lot of people don’t want to say that. They’ll say, “Oh God, don’t be attacking Obama.” Well, this is Obama’s deal, and it’s Obama that’s responsible for this fear in America. The guy keeps making speeches about redistribution, and maybe we ought to do something to businesses that don’t invest or holding too much money. We haven’t heard that kind of talk except from pure socialists. Everybody’s afraid of the government, and there’s no need to soft peddling it, it’s the truth. It is the truth. And that’s true of Democratic businessman and Republican businessman, and I am a Democratic businessman and I support Harry Reid. I support Democrats and Republicans. And I’m telling you that the business community in this company is frightened to death of the weird political philosophy of the President of the United States. And until he’s gone, everybody’s going to be sitting on their thumbs.

Kevin Drum Is An Innumerate Hack

Kevin Drum don’t grok numbers. I think we all knew that. But occasionally he goes so far over the edge that it calls for correction, and today’s one of those days.

Kevin has taken a handy chart (originally here), and drawn some trendlines onto it to proclaim that we don’t have a spending problem at all:

I’ve added some handy lines to show the general trajectory of spending and taxes over the past three decades. Putting aside the Great Recession, which has temporarily cratered revenues and imposed a burst of stimulus spending, the trend is clear: spending has generally gone down, but so have taxes. Future healthcare expenses are a big issue, but the current deficit just hasn’t been primarily a spending problem. It’s been a tax cut problem.

So let’s start at the beginning:

  1. Based on his graph, we don’t have a problem at all. Spending as a percentage of GDP is clearly trending down, as is revenue. If his trendlines are accurate and continue, I’m a happy guy.
  2. In fact, spending is trending down FASTER than revenue, so deficits as a percentage of GDP would be shrinking. Also makes me happy.

The fact that Drum doesn’t even SEE either of these points when he draws his trendlines is further proof that he’s an innumerate hack. If his trendlines were accurate (and they’re not, which I’ll cover later in two ways), they actually suggest that we really don’t have much of a problem at all. Certainly that’s not what he’s trying to prove.

Further, he blames the tax cuts on the spending drops, despite seeing a big jump in revenues after the Bush tax cuts. What he overlooks is that the mid-90’s revenue boom was economy-related, based on the tech bubble, and the mid-00’s revenue boom was economy-related, based on the housing bubble. The current 15% revenue is caused partly by tax rates but mostly by the recession, just as the current 25% spending is caused partly by stimulus spending but also largely by stagnation in GDP. He sees lines on the graph but doesn’t understand their meaning.

But all that analysis belies the point that his trendlines are utter bunk. First, they’re hand-drawn with no rhyme nor reason whatsoever. Warren Meyer at Coyote Blog used Excel to draw proper trend lines, and while the direction of trend is accurate, the slope of the spending drop is MUCH more gentle than Drum’s line. Drum shows spending dropping from 23% of GDP in 1981 to roughly 19% in 2010. Warren’s line shows spending dropping from 22% of GDP to only 20% of GDP. Doesn’t look so striking, does it?

Further, Meyer takes Drum to task for his selection of 1981 as a start point. 1981 was a local maxima of revenue as a percentage of GDP (remember that we were just trying to come out of stagflation at the time), so Meyer draws a similar graph with 1950 [chosen to ensure the extreme spending spikes of WWII were not a factor] as a start date instead, and when you look at Meyer’s graph, you see a much more stark difference in trendline. Frankly, believing as I do that Drum is an innumerate hack (and seeing the source of his graph), I don’t suggest that Kevin Drum chose 1981 deliberately; I personally think Drum isn’t capable of even understanding the point of Meyer’s criticism here.

So I decided to take Drum at face value, and use the President (via OMB) & Congress’ (via CBO) projections of spending and revenue over the next 10 years, keeping Drum’s 1981 start date, to see how those trend lines line up. After all, if we’re going to criticize Obama’s spending and taxation, we should probably criticize the spending and taxation that this President and this Congress are authorizing, not the past.

Here are the trends:

As you can see, 1981-2010 revenue & spending is identical, but the projections diverge somewhat.

  • The CBO projections MUST assume that all current law executes without change. As I pointed out previously, this assumes that ALL of the Bush tax cuts expire, ALL of the temporary stimulus spending expires, and actually assumes that discretionary spending tracks inflation, which is lower than historically occurs. Thus, they’re not only assuming that the tax cuts “for the rich” expire, they’re assuming ALL the Bush tax cuts expire, as is currently slated by law to occur.
  • The OMB budget assumes both lower spending and lower revenues than the CBO, but I haven’t looked in detail to see how they’re getting there. I generally trust the OMB less than the CBO, but I wanted to provide both sets of numbers as the OMB is essentially the number based upon Obama’s policy.
  • In both cases, defense spending as a percentage of GDP drops significantly over the course of the decade, as wars in Iraq and Afghanistan wind down. Thus, the spending impact of defense is not driving this spending jump. However, nondiscretionary spending in the Medicare/Medicaid & Social Security ARE big drivers of that spending jump.

That said, you can see in both cases that the trendline for revenues is up, and the trendline for spending is up, BOTH based upon the start date of 1981, which — deliberately or not — skews the numbers to higher start points for both revenue and spending. And you can see in both cases that the slope of the spending line rises faster than the slope of the revenue line. This is true even in the CBO projection, which fully ends the Bush tax cuts in 2012.

What does it mean if you completely end the Bush tax cuts and quickly wind down the cost of Bush’s wars, and spending STILL rises faster than revenues? Sounds like a spending problem to me…

As I said before, I don’t think Kevin Drum is being deliberately manipulative with these numbers. To believe that, I would have to give him credit for understanding these numbers. Instead, I believe he’s an innumerate hack. I’d ask myself why he continues to be paid, but judging by the grunting matches in his comment section between tribes of Republican and Democrat apes, it appears that there’s a market for his particular brand of mindless drivel.

A Brief Constitutional Lesson for Congresscritters… Particularly those from Kentucky…

United States Constitution
Article 1, Section 7


All bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.

The issuance of debt is a revenue raising measure. The “debt ceiling” is, in fact, legislation initiated in the House of Representatives, which authorizes the executive branch to issue debt through the treasury (and by extension the federal reserve), up to a specific limit.

This “debt ceiling” and authorization of debt issuance; allows the executive branch to raise revenue in a constitutionally legitimate way; because the revenue is raised under the auspices of specific authorization by the house or representatives.

Neither the Senate, nor the House, acting separately or together; has the authority or ability to delegate this exclusive power of the house, to any other entity, including the president. In fact, it would be a clear violation of the principle of separation of powers to do so.

That is all.

I am a cynically romantic optimistic pessimist. I am neither liberal, nor conservative. I am a (somewhat disgruntled) muscular minarchist… something like a constructive anarchist.

Basically what that means, is that I believe, all things being equal, responsible adults should be able to do whatever the hell they want to do, so long as nobody’s getting hurt, who isn’t paying extra

How To Deal With A Stalled Economy

I’ve been spending an inordinate amount of time reading 74 pages of forum posts on an pilot’s message board discussing the crash of Air France flight 447 several years ago. Fascinating stuff. It’s the tale of pilots faced with a situation of mechanical failure, but even worse, a situation which they misdiagnosed and thus took the exact wrong course of action. The basics:

It was at this point, after autopilot turned off and they worked to change their course, that a stall warning sounded, meaning that the airplane wasn’t generating enough lift. The report notes the co-pilot grabbed the controls and lifted the plane, which, according to aviation experts is contrary to normal procedure during a stall, when the nose should in fact be lowered. During the lift, the speed sensors plunged then spiked in an apparent malfunction, the report shows. “So, we’ve lost the speeds,” the co-pilot noted.

For nearly a minute, as the speed sensors jumped, the pilot was not present in the cockpit. By the time the pilot returned, the plane had started to fall at 10,000 feet per minute while violently rolling from side to side. But the BEA notes the crew acted in accordance with all procedures, frantically attempting to command the plane as it pitched and rolled in the sky. The plane’s speed sensors never regained normal functionality as the plane began its three-and-a-half minute freefall.

The report shows the flight remained stalled throughout the drop, with its nose pointed up 15 degrees in response to the pilots’ attempt to generate lift. The flight plunged into the Atlantic nose-up, killing all 228 on board.

Granted, those 74 pages of pilot posts suggest that there are likely some very reasonable explanations for why the situation was misdiagnosed. But key is that it doesn’t appear [from what has been released to date] that the pilots understood — at the point it became critical — that the aircraft was stalled and thus did the exact wrong thing. What they did seems (to non-pilots) to be an intuitive response; if you’re quickly losing altitude, you should try to climb. But this is exactly the wrong approach to a stall. In a stall, your airplane is behaving like an expensive rock, not an airplane. Despite losing altitude you must point nose down until you get enough airspeed over your wings for the airplane to become an airplane again. I’m not a pilot, and I understand enough about aviation to know that.

So why am I posting about such things on a political blog? Simple. Our economy isn’t behaving like an economy, it’s behaving like a rock. We’re stalled. Yet our politicians are trying to do the same thing the pilots of AF447 did to get us out of it: pull back on the yoke [subsidies & intervention] and goose the throttle [monetary and fiscal stimulus]. We’ve got inexperienced pilots at the controls, who know more about flying a plane in Keynesian theory than in Austrian reality.

What happened? Well, previous rounds of throttle [low interest rates / shoddy lending standards of Fed & banks during Bush administration] and pitch [national housing bubble] put our economy up in the realm of “coffin corner”, where seemingly minor changes in AoA or airspeed cause an aircraft to exceed its flight envelope in rapid fashion. I can’t claim that the Obama administration was handed a very easy situation. But that doesn’t begin to excuse them for adopting the exact wrong strategies to dealing with it.

America’s economy is stalled and not responding to your stimulus. It’s rapidly heading groundward and yet everyone in charge can’t seem to explain why pulling the nose up with fancy rhetoric isn’t fixing the problem. The answer is not for the government to try to fix the problem. It’s for the government to stop worsening the stall, get the hell out of the way, and let the economy start behaving like an economy again.

Gov. Johnson Takes on Hannity

Former New Mexico Gov. Gary “Veto” Johnson made a recent appearance on Hannity last week (see video below). I have to say I was pleasantly surprised both with how Sean Hannity conducted the interview and how Gov. Johnson responded. I haven’t really watched Hannity since before the “& Colmes” was dropped a few years ago; from what I remembered he didn’t normally allow guests he disagreed with explain their position (especially on topics like drug legalization). I was also happy that he gave Gov. Johnson 20 plus minutes of some very valuable air time on a program widely watched by Republican primary voters. There’s just no way Gov. Johnson will ever be given that much time in a primary debate.

For Gov. Johnson’s part, I thought he communicated his message very skillfully. His cost/benefit approach that he is campaigning on, especially on issues that the G.O.P base generally disagree (ex: non-intervention and drug legalization/harm reduction) will be helpful in advancing libertarian positions in the long run (much as Ron Paul did in 2008 and since). When Hannity finally broached the war on (some) drugs, Johnson was able to get Hannity to concede that marijuana ought to be considered in a different category from harder drugs (i.e. heroin, crack, etc.). This in of itself is very encouraging.

The Inflation Won’t Come From The Fed

Everyone knows the Fed is pushing Quantitative Easing. By that, it means that when America is having trouble selling T-bills at advantageous interest rates, the Fed prints up some money to keep demand. It buys the bonds with newly-printed money. The recent run was $600B or so, and the Fed’s current balance sheet holds about $2.7T in assets (that they can choose to hold as long as they find prudent — since they print the money to keep them and/or roll them over).

But what if I told you that there was another $11T of outstanding US dollars* out there in the world, and that everyone except the US has a say in whether they are circulated. In fact, that those dollars are sitting on foreign soil is a very good thing for the US and has been for decades, but it’s not assured it will last forever. As I said WAAAY back in 2007:

As I’ve pointed out in the past, the dollar’s status as a reserve currency has largely allowed America to inflate with very little visible burden on our own citizens. We create worthless money, use it to buy durable goods from other countries, and watch as they hold that money or reinvest it in the sinkhole that are Treasury bonds. It’s a credit card on the world, and we can print whatever we need to pay it off…

…as long as they don’t wise up. If they do, suddenly that money might come back to us, and we’ll feel the results of the inflation we’ve engaged upon.

Inflation benefits those who see the money first — in this case, Americans who used that money to buy durable goods from overseas. It has the least benefit for those who see the money last. To date, that has been forex reserves, sovereign wealth funds, etc. But should those foreign nations decide they no longer want to hold US dollars, they’ll spend them right back into circulation — and they’ll eventually want us to sell them goods in exchange for those dollars.

If that happens, the inflation comes full circle and we feel it right here at home — without the Fed ever releasing the $2.7T they have on their balance sheet.

We’ve spent the last four decades, ever since Nixon “closed the gold window”, sending dollars abroad to other nations who stick them under their mattresses. This has been the persistent trade deficit we’ve held. Sure, some of those dollars came back to be lent to our own government to finance even MORE spending that didn’t come from the American people, but much of them quite literally got shoved under the mattress.

What happens if they want to spend those dollars? Well, dollar-denominated assets and goods produced in the US will rise in price. Oil, gold, silver, food (produced in the US), etc. Look at gold, for example: In the last year, gold has increased in dollar terms by over 32%, but by less than 8% in Swiss francs. USD vs other currencies show similar (but smaller) gaps. What can explain this? Well, if nothing else, that big buyers like China and India are using their dollar surplus, rather than their reserves in other currencies, to buy gold.

Where’s the endgame if this dollar-spending widens? Well, eventually those dollars are sold to people who don’t want to buy goods from China or US T-Bills: they want to buy US exports or US assets. That sounds good, of course; everyone likes exports! But is it good? Restate it this way: a durable good (i.e. product of American workers’ output) needs to be produced to leave our shores, and it increases the circulating money supply in the USA. The good we produce here is enjoyed elsewhere, while the increased money supply makes our own goods at home more expensive.

We change from trading our paper for other nations’ hard work to trading our hard work for our own paper back.

The endgame is the end of trade deficits, where we work harder as a nation to supply the rest of the world with goods in exchange for a lower standard of living here. That doesn’t sound good to me at all.

America has enjoyed a very privileged position in the world, and that position has only been possible from two things: other nations have trusted us and they’ve had no other options. The first is eroding to the point where they’re looking for the second. If we want to continue enjoying our position in the world, we need to convince the rest of the world that holding the US Dollar as a reserve currency benefits them — and neither trillion Dollar deficits as far as the eye can see or quantitative easing accomplish that.

When the inflation comes, it’s not going to be the Fed printing money — it’s going to be other nations sending us the money printed over four decades and expecting to buy something with it.
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What’s The Problem, Revenue Or Spending?

I got into it a bit over at Drum’s place, where commenters are arguing that the S&P is a bunch of GOP plants because of the negative outlook report. Given that I spent some time analyzing historical revenue & spending tables with a calculator to generate one of my comments, I wanted to expand on it here.

The CBO expects GDP to grow from $14.9T in 2011 to $22.5T in 2020, an annual growth rate of over 4%, and expects deficits as a percentage of GDP to return to more sustainable levels slightly north 3%. This, of course, assumes the Medicare “Doc Fix” actually goes into effect, and all the temporary stimulus and the extension of Bush tax rates expire at the end of 2011 and 2012, respectively. I suspect it’s unlikely all three events occur. In addition, they assume that rates of growth in discretionary spending programs track inflation, while discretionary spending growth has averaged well above this (7.5%) over the last decade. (Note — it’s unclear in this data set whether the overall spending numbers, i.e. overall GDP, are inflation-adjusted. I assume so if they are calculating a 4% growth rate, unless they are projecting inflation less than 1.5% per year over the course of the decade.)

The S&P says the US debt outlook is ugly and not expected to improve. The S&P considers 4% growth to be their optimistic scenario, and doesn’t see long-term deficits even optimistically to drop below 4%:

In our baseline macroeconomic scenario of near 3% annual real growth, we expect the general government deficit to decline gradually but remain slightly higher than 6% of GDP in 2013. As a result, net general government debt would reach 84% of GDP by 2013. In our macroeconomic forecast’s optimistic scenario (assuming near 4% annual real growth), the fiscal deficit would fall to 4.6% of GDP by 2013, but the U.S.’s net general government debt would still rise to almost 80% of GDP by 2013. In our pessimistic scenario (a mild, one-year double-dip recession in 2012), the deficit would be 9.1%, while net debt would surpass 90% by 2013. Even in our optimistic scenario, we believe the U.S.’s fiscal profile would be less robust than those of other ‘AAA’ rated sovereigns by 2013.

As an example, I ran some numbers on Real US GDP values from 1969->2010, and calculated a compound annual growth rate for the general economy of around 2.79% (Note — I’m not 100% sure of the validity of my data set there, so if someone in the comments wants to check my work, feel free). I think a baseline of 4% GDP growth is wildly optimistic at this point, unless we experience a technology-based productivity shift on par with that we experienced in the 1990’s. I can’t say I see where that change would come from, but then again if I could see where that change may happen, I’d be spending my time investing in it rather than blogging!

Even with those assumptions, where does spending fall historically? Even at these rosy projections, it never falls under 22% of GDP (on par with the highest spending the country has seen since WWII), and those rosy projections came in January 2010. A year later, in January 2011, the CBO outlook got worse. It now shows spending never falling under 23% of GDP during the decade 2011-2020. Historically, spending has not exceeded 23% of GDP for a single year between 1946 and 2008.

For comparison, the stretch of 1996 to 2007 — a subset in those years being the only period of my lifetime where the US gov’t had run a surplus — government spending never exceeded 20% of GDP. We certainly had a negative GDP shock in 2009, and some stimulus programs to go with it, but that doesn’t explain why government should jump by more than 3% of GDP for the decade following.

Where has revenue been over the last few decades? Well, for the years 1991-2000, during which time we suffered one mild recession followed by the tech bubble, total government revenue averaged 18.75% of GDP. For the years 2001-2010, where we dealt with the tech bubble collapse followed by the subprime bubble and then crash, total government revenue averaged 17.07% of GDP. A sizeable drop, to be sure (the worst spots being 2009 & 2010, where the financial crash slammed revenue below 15% of GDP). But fundamentally not that far out of line with historical precedent.

The CBO projections for revenue — assuming the expiration of all the temporary tax stimulus programs at the end of 2011 and the expiration of Bush tax rates at the end of 2012, have revenue exceeding 20% of GDP for the latter half of the decade — which has only occurred since WWII in the years 1952 and 2000. Their projections show tax revenues sustaining well above historical norms as a percentage of GDP, and assuming Real GDP even somewhat approximates their projections, revenues that will be at inflation-adjusted levels well higher than the nation has ever seen.

So where is the problem, on the revenue side or on the spending side? Well, revenue in both percentage of GDP and in inflation-adjusted dollar amounts will be well above historical norms, assuming “optimistic” revenue numbers for the government (expiration of Bush tax rates). Yet spending will still outclass revenue by over 3% of GDP per year with no end in sight. Even if we rescind the Bush tax cuts, pushing revenue to a level this nation has NEVER seen outside of WWII, we’re still unable to pay for the government our Congress demands, because those demands reach sustained levels never seen in the nation’s history with the exception of WWII.

The S&P is right. We have no plan to get our fiscal house in order, and given that we’re adding onto debt levels (public debt held as a percent of GDP) that are well beyond those of other sovereign AAA-rated bonds, one wonders how they can continue to justify our rating. This is a nightmare scenario unlike this country has probably ever seen, and if it doesn’t get addressed, we may be seeing the end of America as we know it.

Revenue is NOT the problem. We need to fix the spending.

Use “YouCut” to Encourage Fiscal Sanity and Restore Liberty

House Majority Leader Eric Cantor has set up a website called YouCut to solicit ideas from regular people for suggestions on specific programs and policies that should be cut or eliminated.

From the website:

YouCut – a first-of-its-kind project – is designed to defeat the permissive culture of runaway spending in Congress. It allows you to vote, both online and on your cell phone, on spending cuts that you want to see the House enact. Each week that the House is in session, we will take the winning item and offer it to the full House for an up-or-down vote, so that you can see where your representative stands on your priorities. Vote on this page today for your priorities and together we can begin to change Washington’s culture of spending into a culture of savings.

YouCut appears to be similar to President Obama’s Change.org site – hardly “first-of-its-kind” as boasted in the paragraph above. And like Change.org I doubt any suggestions like “legalize marijuana” (which was the top suggestion at Change.org but I’m not sure if this is still the case) will be taken all that seriously by House Republicans. Even if more “libertarian” suggestions are discarded, however; the way I see it, if they ask for our input we should give it to them rather than simply bitching and moaning on blogs about how nothing ever changes.

I haven’t taken the opportunity to offer any suggestions so far but I’m sure I’ll be able to come up with a few ideas. Any policy or program that takes liberty away from the individual would be an ideal place to start. Even such “pipe dreams” as ending the war on (some) drugs, ending the TSA, DEA, ATF, and various other alphabet agencies that do essentially the same redundant things*, bringing all the troops home from Iraq and Afghanistan (and most of the rest of the world for that matter), phasing out Medicare, Medicaid, and Social Security, cut defense spending, selling federal land to private entities, and other policies that the Republicans may or may not be in favor of should be at least suggested. All these actions would result in significant savings for the taxpayer as well as restore lost liberties.

There have already been some interesting suggestions on the site. If you do make any suggestions to YouCut, be sure to post them here as well.

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Open Thread: Successes and Setbacks for Liberty in 2010/Hopes for 2011

Was 2010 a good year or bad year for liberty and why? Like most of you will likely respond, 2010 was very much a mixed bag IMHO.

On the positive side, the mandate section of ObamaCare was found unconstitutional, the military’s “Don’t Ask, Don’t Tell” policy was repealed, Wikileaks exposed the federal government for the corrupt organization it is, the Democrats took a beating on election day, and the Bush era tax cuts were extended (though with the return of the death tax, extension of unemployment benefits, and other compromises in the bill, I’m not yet sure if this was a good or bad thing).

On the other hand, Republicans gained ground on election day (I’m not optimistic that they have changed much since the last time they ran things), the vast majority of incumbents in both parties were easily reelected, government spending is way out of control, the Fed wants to pump some $600 billion into the economy by printing more counterfeit money, unconstitutional invasive searches continue to take place at airports in the name of safety, both Democrat and Republican politicians consider Wikileaks to be a “terrorist” organization, and President Obama believes he can assassinate American citizens where they stand with no due process whatsoever.

On the criminal justice front, The Innocence Network (part of The Innocence Project) exonerated 29 individuals in 2010 for crimes they did not commit. Back in March, Hank Skinner came within an hour of being executed when SCOTUS halted the process. Skinner’s case continues to wind its way through the courts. In other death penalty news of 2010, Kevin Keith’s death sentence was commuted to life by Gov. Strickland, Anthony Graves became the 12th death row inmate to be exonerated in Texas, a key DNA sample was determined to not be a match for another Texas man, Claude Jones who was executed in 2000, and Texas continues to stonewall inquiries into the likely wrongful 2004 execution of Cameron Todd Willingham. As these questionable death penalty cases pile up, hopefully this will be the beginning of the end of the death penalty in Texas and elsewhere.

In a couple of other cases we never quite got around to at The Liberty Papers but deserve to be mentioned: Cory Maye was granted a new trial by the Mississippi Supreme Court because the trial judge failed to give jury instructions to consider a “defense of others” defense and in Arkansas, the Arkansas Supreme Court ordered a new hearing for the so-called “West Memphis 3” to consider newly discovered DNA evidence and juror misconduct from the original trial (if you are not familiar with this case, I urge you to follow this link as a starting point. The more I have looked into this case the more disturbing I find it to be…a perfect example of what is so terribly wrong with the system).

Hopes for 2011
Rather than offering predictions for 2011, here are some of my hopes:

– I hope that the justice will be served in the above cases.

-I hope I am wrong about the Tea Party Republicans and that they will actually be a force of positive change for more liberty and smaller government

-I hope that Ron Paul decides not to run for president for the 2012 campaign but instead puts his support behind former New Mexico Gov. Gary Johnson (I’ll get into my reasoning in a future post).

-I hope by this time next year, I’ll have far more successes than setbacks for liberty to report.

Now it’s your turn. How do you feel about the state of liberty in 2010 and how do you feel about the year ahead?

The Trillion-Dollar Zero-Cost Stimulus Program

Want to inject liquidity into the market, support American jobs, and do so without raiding the US Treasury or overheating the printing press? The answer is simple: get out of the way.

Now, some may say that’s a libertarian’s answer for everything. And they’d usually be right. But I’m not signing you up for a precipitous decline in federal revenue. I’m not resorting in protectionist and mercantilist policies destined to impoverish American consumers in favor of American exporters. All I’m asking — or relaying the request of Cisco CEO John Chambers and Oracle President Safra Catz, more accurately — is that the US Government make it easier to bring foreign profits back to our shores:

One trillion dollars is roughly the amount of earnings that American companies have in their foreign operations—and that they could repatriate to the United States. That money, in turn, could be invested in U.S. jobs, capital assets, research and development, and more.

But for U.S companies such repatriation of earnings carries a significant penalty: a federal tax of up to 35%. This means that U.S. companies can, without significant consequence, use their foreign earnings to invest in any country in the world—except here.

The U.S. government’s treatment of repatriated foreign earnings stands in marked contrast to the tax practices of almost every major developed economy, including Germany, Japan, the United Kingdom, France, Spain, Italy, Russia, Australia and Canada, to name a few. Companies headquartered in any of these countries can repatriate foreign earnings to their home countries at a tax rate of 0%-2%. That’s because those countries realize that choking off foreign capital from their economies is decidedly against their national interests.

By permitting companies to repatriate foreign earnings at a low tax rate—say, 5%—Congress and the president could create a privately funded stimulus of up to a trillion dollars. They could also raise up to $50 billion in federal tax revenue. That’s money the economy would not otherwise receive.

The tax picture described is very simple, and it makes American companies make some difficult decisions. A company with overseas profits and a need to reinvest can choose to invest them abroad or here in the US. Those overseas profits can be invested overseas with little or no tax penalty, or they can be invested here with significant tax penalty. The decision becomes simple. It is only smart to invest foreign profits in the US if it is investment that simply cannot be effectively done overseas, because the cost of repatriation is enormous. It’s a trade war, but it’s aiming the artillery inward, not outward.

Anyone who has read my work knows that I am not a fan of government subsidies. I personally think that American corporations and American workers can compete quite handsomely on the world market. We don’t need our government to actively help industry here; we have an educated workforce, developed infrastructure, stable institutions and a strong rule of law. We have everything we need to make it profitable for companies to invest here. We could have a country where overseas profits are re-invested in American workers and the US economy. What we have instead are government policies actively hostile to that end. All I ask is that those policies be rescinded.

America is seen worldwide as pro-business. In many cases, that is true, but certainly not in our corporate income tax system, as described by the Cato Institute here. Rather than being a low-tax laissez-faire bastion of capitalism, we have the highest corporate income tax rate in the developed world:

Reducing the taxes on repatriated profits can be done in a revenue-neutral way. All that is necessary is to choose a tax rate that will balance the tax revenue earned on repatriated earnings at the current rate with the expected revenue earned on the much larger base of repatriated earnings at a lower rate. Some foreign cash is undoubtedly repatriated; as I said there is incentive not to do so, but that incentive in not insurmountable. However, at a lower tax rate it makes sense for more companies to repatriate much larger sums, and I think a baseline rate of 5% as suggested by Chambers and Catz is a good starting point for discussion if remaining revenue-neutral is a goal.

There is up to a trillion dollars out there that could be injected into the US economy without raising the deficit, without spinning up the printing press, and which would go immediately to the entities who have the best ability to invest it in stimulative ways — companies who are already profitable. While many in Congress may not like the idea, as they have little control over how the money is spent, I think that’s a feature — not a bug.

While I’m not a protectionist, I think we should stop government policy designed to hurt American employment and help employment overseas. Of all the policies in which our government engages, one that actively stops capital from flowing into America from overseas seems rather idiotic.
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A Repeal Amendment Would Be A Benefit, But A Limited One

I’m a bit late to the party, but significant discussion has been made about a potential “repeal amendment” to the Constitution. Advocated by Randy Barnett, he suggests that it is a necessary counterpunch to the 16th and 17th Amendments, which together increased the Federal government’s ability to raise revenue to do what it likes while weakening States’ ability to restrain Federal actions politically.

On the opposite side is Ed Morrissey, who has a couple of concerns about the idea. First and foremost, he doesn’t think the amendment will be presented without a Constitutional Convention, an idea that opens a Pandora’s Box with the potential to backfire so spectacularly that it truly frightens me. But second, he is concerned about the messiness of the process:

Let’s say for argument’s sake that Congress approves and the states ratify the amendment. What happens when Congress passes a law? How long do the states have to get two-thirds of the legislatures to demand repeal? Within the same session? Four years? Decades? Does it proceed along the same lines as a Constitutional amendment, where the states have seven years to ratify a veto? If the time is limited to the current session, most state legislatures won’t have time to react, and future Congresses will simply put off most of their controversial measures until lame-duck sessions.

If it isn’t limited to the same session, then this will remove a great deal of certainty and stability from the American legal system and to acts of Congress, which is after all the people’s branch. Consider tax laws on which no one could rely, regulatory and deregulatory efforts that could take years to clarify, and then think how investors both here and abroad will react in that environment. And that isn’t even getting to the budget, which appears subject to this amendment as well. The states could force a shutdown of the federal government. This seems like a prescription not just for gridlock and instability, but also an invitation for an expansion of power for the executive branch to run the federal government by executive order and agency power.

It is here that I think Ed is overstating the likelihood of states to overturn legislation. I think we are highly unlikely to see a widespread application of a repeal amendment for two reasons:

  1. Getting two-thirds of states together to agree on repeal of any particular provision due to voter anger is unlikely except in the most egregious cases. I’m not sure we could get two-thirds to vote to repeal Obamacare.
  2. The incentive to repeal purely federal matters isn’t there for the states. Morrissey suggests that the states might repeal particular tax provisions. Buy why would states care about Federal income or corporate tax rates that don’t directly affect their own budgets?

For these two reasons, I expect the most hoped-for results of a repeal amendment — states wholeheartedly fighting expansion of federal power — will not come to pass. I just don’t see the incentives lining up to make that happen. States have plenty of their own problems to worry about; they’re not going to trouble themselves with something that doesn’t directly affect their own powers or budgets. This doesn’t mean that such a power will never be utilized, but only in cases where public opinion is so overwhelmingly against a policy but for which Congress cannot find the will to act on their own to end it.

At the same time, I do see a very important potential application, for which the incentives line up perfectly. It’s all about unfunded mandates. The Feds have a tendency to demand certain behaviors by the States without properly funding those behaviors. It is a way for Congress to placate their own desire for control without actually paying for those desires. States have a perfect incentive to repeal laws which impose costs upon them not of their own choosing, and thus a repeal amendment could be a very powerful constraint on Congress’ ability to enact laws and regulations for which it puts the burdens on states to fund.

It is for this reason that while I don’t have high hopes that its scope will reach as widely as its proponents may claim, that I still support a repeal amendment. Cutting into Congress’ ability to saddle states — who are already in dire financial straits — with unfunded mandates will have overall positive effects. It forces Congress to pay its own way, and while Congress hasn’t shown any concern about deficit spending, it at least adds one additional check on their appetite. Adding to this the ability for states to act as an additional check on Federal action when those policies are so egregious as to override the states disincentive to act on most Federal matters is just gravy.

A repeal amendment is not the answer, but it’s certainly a step in the right direction.

Fidel Castro’s Incredible Revelations

Fidel holding a book

In an interview with The Atlantic’s Jeffrey Goldberg, some incredible quotes came from the aging Cuban dictator:

(Reuters) – Fidel Castro said Cuba’s economic model no longer works, a U.S.-based journalist reported on Wednesday following interviews with the former president last week.

Jeffrey Goldberg, a writer for the Atlantic Monthly magazine, wrote in a blog that he asked Castro, 84, if Cuba’s model — Soviet-style communism — was still worth exporting to other countries and he replied, “The Cuban model doesn’t even work for us anymore.”

The comment appeared to reflect Castro’s agreement, which he also expressed in a column for Cuban media in April, with his younger brother President Raul Castro, who has initiated modest reforms to stimulate Cuba’s troubled economy.

Goldberg said Julia Sweig, a Cuba expert at the Council on Foreign Relations think tank in Washington who accompanied him to Havana, believed Castro’s words reflected an acknowledgment that “the state has too big a role in the economic life of the country.”

I sent my esteemed colleague Larry Bernard, who contributes to Global Crisis Garden, a link to the story and he promptly said “Holy shit.” Indeed. If even Fidel Castro is putting a gravestone on the Marxist-Leninist style of government, that really is progress.

The interview also produced a line from Fidel Castro critical of Iranian president Mahmoud Ahmadinejad and his endless anti-Semitism:

Does this release him from the “Axis of Evil”? Cuban Leader Fidel Castro attacks Iranian President Mahmoud Ahmadinejad for his anti-Semitism in an interview with The Atlantic’s Jeffrey Goldberg. Quotes include, “I don’t think anyone has been slandered more than the Jews,” and “The Jews have lived an existence that is much harder than ours. There is nothing that compares to the Holocaust.”

Fidel Castro is going to have to act along with his words. He came into the international political world as a Vladimir Lenin. If he really wants to, he can leave a Mikhail Gorbachev. This would require stepping from power and leading a transition not toward continued Castro hereditary rule but towards a Jeffersonian Chile-style system of political freedom, market economies and a welfare state all checking and balancing one another. Chilean leaders only serve one term, despite their personal popularity.

It would also require either a break with or a push toward Hugo Chavez, Castro’s buddy, to change his destructive policies and populist rhetoric. Chavez has allied himself with nightmare regimes in the Middle East and exercised his own anti-Semitism. Nationalization of industries has led to rationing and shortages (while Chavez continues to appear delightfully plump in public appearances, counter to his trim days in the military). Meanwhile, Chavez has forced initiatives to give him unlimited power and has refused to groom a successor. To make matters worse, violence in Venezuela is worse than in Iraq, and without Iraq’s room for economic and political optimism.

If Castro really has had an awakening moment in which he has realized dictatorships simply don’t work, it’s going to be meaningless if the same failed formula continues to be tried elsewhere.

Obama’s Budget And The Deficit

Everyone expected 2009 to be a budget-busting year for Obama. With the country mired in recession, tax revenues were plummeting just as his stimulus spending was spiking. We ended up with a bit $1.4T deficit for the year.

But his 2010 budget promised a light at the end of the tunnel. His stimulus spending was sure to restore us to recovery. His FY2010 budget called for economic growth of 3.2 percent in 2010, and 4 percent in 2011.

So how are those projections coming along? Ethan Harris, head of developed markets research at BofA Merrill Lynch, had this to say:

The possibility of the economy lapsing into another contraction during the next year is 25 percent, he said in a Sept. 1 report. Harris cut his forecast for growth this year by 0.1 percentage point to 2.6 percent and lowered his 2011 estimate by a half point to 1.8 percent, according to the report.

Congrats, Obama! Even if we somehow manage to avoid a double-dip, you’re spending us far further into debt than even you promised!

State Debt A Problem Well In Advance Of Great Recession

I saw a chart today that took me aback. At the Cato @ Liberty blog, a look at aggregate state debt over the last decade:

I had well expected that state governments were growing their budget in accordance with the boom economies of the past decade (especially rising property tax collections through the boom), but hadn’t realized that they were piling on loads of debt ON TOP OF that new spending.

Of course, I don’t labor under the false belief that state governments are fiscally responsible, but one would have thought that they might have been happy to spend merely the new windfalls they were reaping in revenues, not far outstrip those windfalls with added debt-fueled spending.

Napoleon said “Never ascribe to malice that which can be adequately explained by incompetence.” I certainly think there’s incompetence involved, but I’m not sure the explanation is adequate.

Voting For Smaller Gov’t In November? Good Luck

As Chris pointed out last week, Republicans might be able to get us to at least a divided Congress in November. One expects that if they do, they’ll stand athwart the tracks as the big-government train approaches, yelling STOP!

But their bark is worse than their bite:

Yeah! Go Red team! Go Democracy!

via TJIC, who as always gives it the extra flourish that a graph like this really needs.

Prosecutors Ask If Congress Duped CBO To Obtain Favorable Score

Okay, that’s not true. But it’s no different than this:

Prosecutors Ask if 8 Banks Duped Rating Agencies

Wall Street played a crucial role in the mortgage market’s path to collapse. Investment banks bundled mortgage loans into securities and then often rebundled those securities one or two more times. Those securities were given high ratings and sold to investors, who have since lost billions of dollars on them.

At Goldman, there was even a phrase for the way bankers put together mortgage securities. The practice was known as “ratings arbitrage,” according to former workers. The idea was to find ways to put the very worst bonds into a deal for a given rating. The cheaper the bonds, the greater the profit to the bank.

The rating agencies may have facilitated the banks’ actions by publishing their rating models on their corporate Web sites. The agencies argued that being open about their models offered transparency to investors.

But several former agency workers said the practice put too much power in the bankers’ hands. “The models were posted for bankers who develop C.D.O.’s to be able to reverse engineer C.D.O.’s to a certain rating,” one former rating agency employee said in an interview, referring to collateralized debt obligations.

I just finished reading Michael Lewis’ The Big Short, and it’s pretty clear that the banks knew enough about the rating agencies’ models to pretty successfully turn shit into shinola. In fact, the agencies made enough of their ratings models public to make it absolutely certain that the banks would game the system. Not *dupe* the rating agencies, mind you, because the ratings agencies were willing partners.

But I thought about it a little bit more, and I was struck by another thought.

The Democratic house leadership wanted to cost projection of the healthcare bill to come in within a certain number. So what did they do? They duped gamed the CBO rating system to ensure that the bill they wrote would have the price tag they wanted it to have. The CBO is a respected and non-partisan office, but they’re asked only to score what legislators give them, NOT what they think the legislators will do in other bills immediately or a few years down the line.

Essentially both the Wall Street banks and Congressional leadership did the same thing: they were teaching to the test. They knew specifically what was needed in order to generate a favorable outcome from the “test”, and they made sure they did exactly what they wanted, but in such a way that got the right score.

So who’s going to prosecute the Democratic leadership when this healthcare bill inevitably costs the American people more than they advertised?

The Social Security Trust Fund In Kindergarten Terms

Yesterday I had $10 in my right pocket.

I loaned that money to my left pocket, which I like to call my “Right Pocket Trust Fund”. I put an IOU from my left pocket into my right pocket to document the loan.

I then spent that $10 on lunch.

Today my right pocket wants to start collecting on that loan.

——————————

That’s the Social Security Trust Fund. An IOU that requires new taxation, NOT drawing down on savings, to be repaid.

(Inspired by Megan McArdle)

Quote Of The Day

Those of us who predicted lenders would avoid US Treasuries during the financial meltdown we initially somewhat surprised to see investors flocking to them. It’s the result of a supposed “flight to quality”, and nothing at the time seemed less risky than buying US Treasury bonds, since the Treasury sells its bonds in a currency it can print.

Well, that has changed, as represented by yields:

The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.

When it’s “safer” to lend to a corporate businessman who can’t print his own currency or extort his subjects citizens for more tax dollars, you know something serious is going down.

Berkshire Hathaway, P&G, Johnson & Johnson, and Lowe’s are all trading below similar maturity US T-bills, a situation the linked article calls “exceedingly rare”.

But don’t worry, mere citizen. I’m sure Obama’s working on an individual mandate to get you to “do your part” and invest in Treasury bonds.

Hat Tip: QandO

UPDATE: Looks like yields are continuing to rise.

Porkulus III Passes Senate With Republican Help

The Senate passed Porkulus III by a vote of 70-28 with 13 Republicans demonstrating their party’s new found fiscal conservatism by crossing over to vote with every Democrat present for the bill. Like the first Porkulus signed by George W. Bush in 2008 and the Porkulus II passed last year, Porkulus III forks over billions of borrowed dollars to fund various special interest projects and tax gimmicks in the name of “creating jobs”.

The gimmicks funded in this lastest round of Porkulus include a tax holiday for the remainder of the year on Social Security payroll taxes, but only if the company hires someone out of work for more than 60 days. In addition, Porkulus commits to billions in in more mass transit spending and more highway projects (ie. more pork barrel spending).

The Senate’s version of Porkulus must be sent over to the House where it must be reconciled with the House’s much more expansive $154 billion Porkulus bill. However, the Senate plans to pass more items in the House’s bill one at a time so that Senate Majority Harry Reid and other Democrat leaders can find out how much the prices of the votes of “fiscally conservative” Republicans are.

Included are proposed Senate bills giving away corporate welfare to ethanol producers, which is expected to be supported by farm state Republicans. In addition, there is another planned Senate bill to keep Americans out of work longer by extending unemployment benefits and COBRA.

The RINOs who supported Porkulus III today are:

Alexander (TN)

Bond (MO)

Brown (MA)

Burr (NC)

Cochran (MS)

Collins (ME)

Hatch (UT)

Inhofe (OK)

LeMieux (FL)

Murkowski (AK)

Snowe (ME)

Voinovich (OH)

Wicker (MS)

Kay Bailey Hutchinson (TX) deserves special recognition for not even bothering to show up to do her job and vote either way. While the other choices in the upcoming GOP primary for governor are not that great either with ex-Democrat and Bush acolyte Rick Perry and birther/truther Debra Medina, Hutchinson deserves some um…recognition for not doing her job today.

In addition, Richard Burr and Lisa Murkowski are also up for reelection this year and both of those politicians deserve recognition for their vote to add to our national debt and for more wasteful spending. Finally George LeMieux was recently appointed by Florida Governor Charlie Crist to the Senate seat. Crist is looking to join the Senate himself. Florida voters should keep this in mind when they vote on Crist’s promotion.

I’m one of the original co-founders of The Liberty Papers all the way back in 2005. Since then, I wound up doing this blogging thing professionally. Now I’m running the site now. You can find my other work at IJ Review.com and Rare. You can also find me over at the R Street Institute.
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