Comment on preceeding article

From a comment attached to the preceding article:

Never try to explain to a Democrat how not soaking "the rich" is good--it wastes your time and annoys the Democrat.

Recommended: America Needs a 12-Step Recovery Program

Also in Forbes Dec 13, 2010 is a good article by Rich Karlgaard (publisher of Forbes), America Needs a 12-Step Recovery Program.  The allusion to the Alcoholics Anonymous program is not incidental, since as a nation we are clearly addicted to a number of unhealthy things, like debt-financed social programs and Middle Eastern oil. Karlgaards suggestions make sense to me.  The question is how can we get a ruling elite in Washington to ever enact any of these policies?

Recommended: The Bush Tax Cuts Were (Very Mildly) Progressive

Forbes has an interesting article entitled The Bush Tax Cuts Were (Very Mildly) Progressive. The author, Clifford Asness, says at the start

There is a perception that the Bush income tax cuts were a massive gift to the wealthy. Well, that's kind of true. But along with that perception seems to come the notion that they were massively regressive, benefiting the wealthy at the expense of the middle-class and poor. That's just not true.

Jingoism unsupported by facts seems to be the currency of politics, I guess because most people are easily seduced by simple ideas, especially if they fit their preconceived beliefs or political philosophy. This is certainly evident in the current tax debate, which seems to be almost completely fact-free. Asness does the math in this article (which will lose the 90% of the population that are math-illiterate) to prove his point.

In fact, taxes have to increase (and government spending has to be reduced) if we are to avoid a catastrophic failure of our national finances.  There is a valid argument against raising the taxes in the middle of an economic recession, but that excuse only lasts for the next year or two.  Where is the plan to raise taxes and cut spending after that?

Recommended: Why Not Soak the Rich?

Victor Davis Hanson had  a good post yesterday entitled Why Not Soak the Rich?  He asks why the number $250,000 was picked to become the dividing line in the new class warfare.  Is that magic number what really discriminates between "the rich" and "the rest of us"?  Worth reading and thinking about.

Ineffectiveness

Walter Russel Mead has a piece in The American Interest, Bureaucrats Swindle Greens in Cancun, in which he argues that Cancun was a win only for UN bureaucrats, who can keep the "process" going (more all-expense paid trips, more jobs) even though they are doing nothing effective about the underlying problem.  The piece is worth reading in its own right, but it made me stop for a moment and re-asses how effective the US government has been over the past couple of decades at addressing any of the major issues of the day.

To my way of thinking , the US faces at least six major long-term issues these days (the current economic problems are not included because, bad as they are, they are relatively short-term issue, though they have an impact on long-term issues).  Most of these issues are faced by other nations as well, but the issues of particular concern to the US include :

1) Unsustainable government debt at all levels, national state and local.
2) Climate change.
3) Over-dependence on non-renewable fossil fuels.
4) Impending water shortages.
5) Terrorism in a modern society whose infrastructure is highly vulnerable to terrorist attacks.
6) Nuclear proliferation among rogue nations or nations unfriendly to the US.

Now think, has anything truly effective been done about any of these six issues in the past two decades, under either Republicans or Democrats?  I can't think of any effective steps that have been taken -- lots of symbolic steps, pledges, rhetoric and campaign promises, but no effective steps I can think of.

There certainly haven't been any effective steps taken on the debt crisis in the US.  Indeed, the bipartisan agreement on tax cuts just negotiated between Obama and the Republicans just makes the debt problem $900 billion worse.

Climate change is a joke.  The Kyoto agreement, weak and ineffective as it was, wasn't followed even by the nations that signed it, and now is effectively dead with nothing to replace it.  And the US can't seem to do anything meaningful to help.

On the issue of our dependence on oil nothing effective has yet been done. Oh, we subsidize ethanol production (which takes more oil energy to produce than it replaces, but subsidizes corn-belt farmers and their politicians) and build a few wind farms. But we have yet to do anything that would have a significant impact on the problem.

The water shortage problem hasn't even gotten on the US political radar yet, even though we have major cities on the verge of water shortages, and a major battle in California's central valley over water rights.

About terrorism, as far as I can tell our adventures in Afghanistan just moved Bin Laden's organization to Pakistan and Yemen, and all our Iraq adventure has done (besides cost us a fortune and a lot of American lives) is to remove pressure from Iran and help recruit more terrorists. The massive new Homeland Security bureaucracy has proved even more cumbersome and expensive, and somewhat less effective, than the array of agencies it replaced.

And on nuclear proliferation, nothing we have done has stopped India, Pakistan, North Korea or Iran in their (largely successful) efforts to master nuclear weapon technology.

Yes, one can point to the occasional small gain here or there on these issues, but nothing that has actually significantly reduced the magnitude of any of these problems. I conclude from this that the current political system - Republican and Democratic alike - is simply not up to the task of addressing today's major issues.  It may be time to start thinking about a wholesale replacement of the current political establishment with a third party. (and no, I don't think the Tea Party is the best candidate for this).

Recommended: Democrat's Existential Debt Problem

David Paul Kuhn has an interesting article, Democrat's Existential Debt Problem, over on the RealClearPolitics site. He argues that while Republicans have been in the lead (rhetorically, at least) in arguing for the importance of reducing the nation's debt load, it is Democrats who are most at risk from debt problem, and it is Democrats who - if they were wise - would press hardest for debt reduction, because it is progressive social programs like Social Security and Medicare and the health bill  and union pensions that are most likely to be cut in a debt crisis.

I made a similar argument a few days ago in one of my posts - liberals ought to care passionately about the nation's economic health because business is the ultimate source of the revenue needed to sustain their social programs. But I see no sign yet that Democrats understand that.

Recommended: Reality Check

Thomas Friedman's Op Ed in the Dec 11, 2010 New York Times is right on.  The article, Reality Check,  argues that the U.S. can do nothing to help the Israel-Palestine problem until the two sides themselves decide to negotiate seriously.  Until then, U.S. aid just perpetuates the illusion on both sides that they can wait until the U.S. makes a better offer, and by the way avoid having to deal with their own people. It is a well-argued thesis, I think it is right, and I wonder why after some 50 years of American negotiators and presidents trying fruitlessly to get the two sides to agree on something we haven't learned that it is useless. (Einstein: Insanity: doing the same thing over and over again and expecting different results).  Until they themselves want an agreement, it isn't going to happen.  And they may never want an agreement - more fools they.

Recommended: Voyager: Seeking Newer Worlds in the Third Great Age of Discovery

Voyager: Seeking Newer Worlds in the Third Great Age of Discovery, by Stephne Pyne is a wonderful book and I highly recommend it.

The Voyager 1 and 2 spacecraft are the first man-made objects to escape the gravitational pull of the sun and begin to travel to the stars. In their journey they have done a “Grand Tour” of the outer planets and sent back enough new data on them to keep astronomers busy for a lifetime. Pyne tells the story of these remarkable spacecraft, from the early political and scientific battles to fund them through to their last planetary encounter, though they are still operating and sending data back and may continue to do so until about 2020. He sets their exploration of the solar system in the context of the two previous great ages of exploration, the First Age led by intrepid Portuguese explorers at the time of the Renaissance and the Second Age, in the 18^th century, that coincided with the Enlightenment. This is a wonderful book, part science and part history/philosophy, that shows the continuity of today’s explorations of space with previous periods of great explorations.

Recommended: The Crisis of the American Intellectual

Walter Russel Mead has a fascination post today on The American Interest site entitled The Crisis of the American Intellectual.  Well worth reading and pondering.

Recommended: Obamanomics Takes a Holiday

Along the same lines, it is worth reading the Op Ed in today's Wall Street Journal entitled Obamanomics Takes a Holiday. Also the article referenced in it entitled The Bush Tax Cuts Never Went Far Enough.

One of the major differences between the political parties is their attitude toward taxes. Republicans want (in theory) lower taxes and smaller government.  Democrats want (again, in theory) more government services and income redistribution, of necessity paid for by higher taxes. And overlaid on these ideological differences is the short-term question of how best to stimulate the economy and create jobs in the current recession.

Democrats persist in thinking (or at least in arguing to their supporters) that if we would only tax the rich more, and tax "rich" corporations more, we could pay for all the lovely liberal government programs they would like. Republicans persist in believing that cutting taxes solves all economic problems. Both views have kernels of truth, but both are naive oversimplifications.

In fact the wealthiest 1 percent of the population already pay about 37 percent of the total personal income tax. The top 10 percent pay about 68 percent of the tab. Meanwhile, the bottom 50 percent—those below the median income level—pay just 3 percent of the taxes. So in fact the rich are already being soaked. But it is in general only the rich (or at least those above the median income level) who have enough discretionary money to invest in businesses, which are the economic engine of the country and the ultimate source of government revenue, so money extracted from them for taxes is not available for investment.  Supporters of taxing the rich more argue that the rich "save" most of their untaxed money, rather than "spending" it to drive the economy, so that tax cuts to the rich are less effective as an immediate economic stimulus, which is true. But what does "save" really mean?  It means they invest most of  it, either directly or through banks or funds, which creates more business and more jobs in the long run.

As for the Republican argument, it is true that higher tax rates have a negative effect on the economy.  For businesses, taxes are an expense, and the higher their expenses the less competitive they are in the world market. For individuals, taxes reduce their discretionary income and hence their purchases, which in turn reduces the volume of the economy. On the other hand, the government needs revenue to do the things the electorate would like them to do (like maintaining the streets and protecting the nation). If we don't tax enough to do these things the government's only alternative is to borrow money, which is what has gotten us into this fiscal mess in the first place.

The issue of tax rates cannot be separated from the question of what services the government will provide.  If we want more services, we need to tax more to pay for them, but that impacts  the economy and ultimately reduces tax revenue. But if we want less taxes, then we need to reduce the services the government provides us, so that the government can pay for the remaining services with the reduced tax revenue it is receiving. (this isn't rocket science, but most politicians act as if they don't understand this).

So rather than argue about tax rates, we really ought to be arguing about which government services, at  what level, we are willing to pay for -- that will determine the optimal tax rate.  And clearly, since at any tax rate government revenue is tied directly to the size and health of the economy, first priority ought to logically go to government services that support, sustain, encourage and promote private enterprise and jobs - the ultimate source of government revenue.

Bipartisonship?

Politics has been described as the art of compromise - two sides each give a little and get a little, and while the result isn't what either side would like ideally, at least something gets done.  During the Presidential campaign  Obama promised repeatedly that his Democratic administration would focus on bipartisanship.

Well, after two years of Democrats ramming bills through Congress without consulting Republicans, and Republicans saying "No" to anything the Democrats propose (even ideas they themselves had proposed earlier), we now finally have a truly bipartisan bill to extend the Bush era tax cut and unemployment insurance.  And what is happening?  A large number of Democrats, especially in the House, are furious and threatening not to support the bill because it has compromises! The right wing of the Republican party is, of course, famous for demanding ideological "purity", even if it means they lose elections. Apparently Democrats suffer from this same insanity.

Where is reality in today's politics?

If one reads through the current writings of the various Op Ed writers and popular bloggers, one gets two conflicting messages, depending on the political persuasion of the writer:

•   President Obama and the Democrats are in trouble because they aren’t standing up strongly enough for their liberal beliefs.  They should have held out for the public option in the health care bill. In the midterm elections, they should have run proudly on passing the health care bill. In the current negotiations on extending the Bush-era tax cuts, they should block any bill that includes an extension of the tax cuts for the rich. They should push to make America more like Europe, with a wider government safety net and tighter government regulations. They should address the growing economic disparity between the wealthy and the middle class.

or

•  President Obama and the Democrats are in trouble because their liberal ideas are too liberal for a nation which most polls reveal is really center-right in outlook.  They should have focused  more on repairing the economy and stimulating business, and not wasted so much time and political capital on serious but peripheral issues like cap-and-trade and the health care bill. They are too anti-business in outlook (or alternatively, they just don't understand business). They truly are “tax and spend” Democrats, and they are running up a ruinous national debt that will eventually cause us all a lot of pain.

Both sides have good arguments. Both sides have articulate and persuasive supporters, though, not withstanding talk radio and Fox News, the media in general appears to be biased somewhat toward the liberals, as is the academic community. And there is a grain of truth in both perspectives.  So what is one to make of all of this? Where is reality among all these conflicting views? Here are some observations that may help get to reality:

First, the Federal debt truly is a huge problem.  Many states are also in deep trouble financially.  Our governments - Federal and state - simply spend more than they can afford at the current tax rates. Here, from http://www.usgovernmentspending.com, is the Federal debt as a percentage of GDP for the last 50 years, since 1960:

 By comparison, Ireland’s debt to GDP ratio is projected to rise to 94.7% of GDP in 2011, and that has caused a monetary crisis in the EU zone.  Clearly the US Federal debt to GDP ratio is approaching a similar danger zone, if it has not already reached it. 

The Federal debt is currently $13.8 trillion, and the Treasury Department projects that it will rise to $19.6 trillion by 2015.  We currently spend about $414 billion per year on interest payments on the Federal debt, at an average interest rate of about 3%.  We get this low interest rate because the markets in general still trust US Treasury notes. The interest rates on Ireland's government bonds (what they have to offer investors to get them to buy the bonds), now that they are in trouble, have risen past 8%.  Greek government bonds last year reached 15.5% interest rates before the EU bailed them out.   Should that happen to US Treasury notes, with no one big enough to bail us out, the results would be catastrophic for our economy (as well as the world economy).

Second, the Federal deficit is not really a party issue, a Democrat vs Republican issue. While it is true that the national debt is ballooning uncontrollably under this Democratic administration, the previous Republican administration was also fiscally feckless.  During the eight years of the second Bush administration, the Federal deficit climbed from 63.4% of GDP to 83.4% of GDP, an increase of about $4.9 trillion. During these first two years of the Obama administration, that debt has increased another $3 trillion and is projected by the administration itself to increase about $5.9 trillion by the end of his first 4-year term. So this debt problem isn’t confined to one party or the other; it is endemic in our whole current political system. It is true that there are philosophical differences between the parties – Republicans in general are against tax increases, Democrats in general are against decreases in public services – but in practice both parties really operate about the same, taking whatever is the most politically expedient course at the moment.

 

Third, numerous polls continue to show that the country as a whole is more conservative than liberal, by a good margin.  Here, for example, is the Gallup poll tracking of self-reporting conservatives, independents and liberals since 1992:

As the recent mid-term election showed, the majority of the voting public is not comfortable with either (a) the liberal agenda or (b) the high rate of government spending, and/or (c) the lack of progress in restoring jobs to the economy by the current administration.  The significant shift of the independent voters, who tend to be moderates, away from Democratic candidates makes this clear.

Fourth, private business provides almost all of the government income.  As of 2008, here is where the Federal government gets its money (when it isn't just printing more money out of thin air, as it is doing now):

 Clearly, almost all of it comes direct or indirectly from private business - corporate taxes or taxes on what workers earn.  So just as clearly a government that wants a lot of revenue to play with ought to do whatever it can to encourage and nurture private enterprise, because that is where its revenue comes from.  There simply are no other significant sources of revenue for a government.

From these facts, I think a reasonable person, not constrained by political ideology, would conclude:

1. The Federal debt is probably the single most important problem to tackle, and the problem is big enough that it will take both substantial cuts in spending and substantial increases in revenue (taxes) to solve it.

2. The revenue and the jobs that provide that revenue can only come from private enterprise (businesses), so one ought to do everything possible (loosen government regulations, improve education of the workforce, stimulate innovation, encourage investment, etc) to improve the US business environment and create more well-paying domestic jobs as fast as possible.

3. Cuts in government spending are of necessity going to curtail or eliminate some programs. Because of  point (2) above, priority needs to go first to preserving programs that encourage economic growth and jobs creation, even if it is at the (perhaps temporary) expense of more popular liberal social programs. It may seem cruel to cut Social Security to the elderly or food stamps for the poor now, but it is nowhere near as cruel to them as a major economic collapse of the nation's (and therefore the world's) economy would be.

4. Liberal programs to redistribute wealth or increase government services (and many of these are laudable goals) can only be provided in sustainable form if the economy is healthy enough to provide the required revenue. So a healthy economy has to be the first priority, even for liberals - once the economy provides enough revenue, then and only then we can figure out what social programs might be useful.

Ingroup justice

The House of Representatives formally censured Rep. Charles Rangel (D - New York) for evading Federal taxes, filing false Federal forms, lying to investigators, misusing rent-controlled housing and several other infractions. There has been a lot of debate on the net and among news commentators about whether his punishment was not enough, too much, or just right.  It seems to me a reasonable way to make this judgment is to ask what would happen to an ordinary person like you or me who was found to have evaded Federal taxes, provided false information on required Federal forms, misused rent-controlled housing, and lied to Federal investigators. Would we have just gotten a public ten minute dressing down?  I don't think so.  I think we would have faced prosecution, fines and even perhaps jail time. 

It isn't particularly surprising that an in-group protects its own (and Congress is certainly an in-group). But it is surprising that they are so brazen about it.  Personally I think Representative Rangle should have been  thrown out of Congress for his misdeeds.   He certainly would have been thrown out of any private company for similar misdeeds.  But then Congress, while always ready to demonize others over their misdeeds, has always held itself to a much lower standard.  Why do we, the voting public, let them get away with it?

Recommended: The Age of Adolescence

Also worth reading this morning is Victor David Hanson's The Age of Adolescence.  Yes, it's a conservative rant of sorts, but nonetheless I think his points are valid and worth thinking about.  There is something adolescent about the way our elected government representatives are running things these days, and since we elect them, there has to be something adolescent about the way we vote as well.  Worth pondering.

Recommended: The Big American Leak

Thomas Friedman's The Big American Leak in today's New York Times Op Ed page is worth reading.  I think he is right on!

Recommended: Aftershock: The Next Economy and America's Future

Reich is a professor at the University of California, Berkeley, a past Secretary of Labor in the Clinton administration, and author of about a dozen books on public policy and the American economy.  In Aftershock: The Next Economy and America's Future he argues that the current recession, while perhaps sparked by a housing bubble, is really due to a more fundamental problem – that the American middle class can no longer afford to buy as much as the American economy can produce.  And this, he argues, is due to the increasing concentration of wealth in the hands of a few.  As he points out, in the late 1970’s the richest 1% of the country controlled 9% of the wealth, while in 2007 that same 1% controlled 23.5% of the nation’s wealth, a ratio last seen in 1928, just before the Great Depression.

He argues the liberal position for stronger labor unions and tighter government control, but also for better education and job retraining and a more equitable distribution of corporate profits. While I tend to share the conservative suspicions of government effectiveness, his arguments about the pernicious effects of income inequality on the economy are persuasive. Certainly it is clear that part of our government's current problem is that it is unduly influenced by big money, whether from labor unions or corporations or special interest groups. And no one missed the fact that in the recent bailout, Wall Street brokers and bank CEOs (the very people whose poor decisions brought on the recession) got their huge bonuses while the rest of the country suffered.

So I have to say that this book made me re-examine some of my moderately conservative beliefs. Certainly large unearned inequities of any sort lead eventually to civil and political unrest, and sometimes to outright revolution, so one has to take his arguments seriously.

Unbelievable!!

From The Associate Press, December 4, 2010:

Senate Majority Leader Harry Reid is pushing behind the scenes for lame-duck legislation that would allow poker games over the Internet but restrict initial licenses to casinos and racetrack operators that have been in businesses at least five years.

Some of the biggest casino operators in Reid's home state of Nevada are eager to get a piece of the online gambling industry, which generates an estimated $5 billion a year for offshore operators.

Unbelievable!  The Senate hasn't funded the government yet for the coming year, nor settled the question of the upcoming tax increases as the Bush-era tax cuts expire, nor dealt with the still moribund jobs market or the upcoming end of unemployment benefits for the long-term unemployed, nor discussed approving the START treaty with Russia - and Senator Reid is wasting time trying to get an internet gambling bill through the lame-duck Congress. 

Good try....but no dice

Democrats, faced with losing control of the House of Representatives January 1st, hoped to push through a lot of bills dear to their liberal base in this lame duck session in order to strengthen their record for the 2012 elections.  I see that Republicans have checkmated this effort by stating, boldly and bluntly, that the two most important issues at the moment are preventing a tax increase January 1st when the Bush-era tax cuts expire, and funding the government (This year's funding ran out Sept 30, and the temporary funding extension that Congress voted runs out this Friday), and that Republican Senators will block all other legislation until the Senate deals with these two issues.

Frankly, I think the Republicans are right. These are the two most pressing issues right now. Congress, under the Democrats, has spent all year on other issues and failed to deal with these two fundamental issues, so I'm glad the Republicans are forcing their hand.  Of course the Democrats are furious at being outmaneuvered, but clearly they still haven't gotten the message from their mid-term drubbing at the polls.

Now the next question will be whether the Republicans are really serious about getting the economy going and cutting government expenditures, or whether that was just campaign talk.