Recommended: What's Wrong with America's Economy

This week's Economist has a good article, What's wrong with America's economy?  Worth reading and thinking about. The two paragraphs that got my attention are:

Youth unemployment is especially high, and joblessness among the young leaves lasting scars. Strong productivity growth has been achieved partly through the elimination of many mid-skilled jobs. And what makes this all the more worrying is that, below the radar screen, America had employment problems long before the recession, particularly for lesser-skilled men. These were caused not only by sweeping changes from technology and globalisation, which affect all countries, but also by America’s habit of locking up large numbers of young black men, which drastically diminishes their future employment prospects. America has a smaller fraction of prime-age men in work and in the labour force than any other G7 economy. Some 25% of men aged 25-54 with no college degree, 35% of high-school dropouts and almost 70% of black high-school dropouts are not working .

Beyond the toll to individuals, the lack of work among less-skilled men could have huge fiscal and social consequences. The cost of disability payments is some $120 billion (almost 1% of GDP) and rising fast. Male worklessness has been linked with lower marriage rates and weakening family bonds.

Along the same lines it is worth reading Don't Mean to be Rude, but the Economy Sucks, by Henry Blodget on the Business Insider website. It's not an upbeat view, but worth reading and thinking about anyway. Once again, I have to fault the Democrats and the Obama administration for wasting so much time and political capital on the health care bill while the economy continued to go South.

Useless hysteria

Liberal commentators, bloggers and members of Congress, as well as the President himself, continue to make hysterical and largely unfounded assertions about Representative Ryan's budget proposal, claiming that it will impoverish millions of seniors, make untold numbers of little children homeless, and who knows what else.What is becoming clear to me is that behind this hysteria the Democrats themselves have no alternative proposal to get us out of our debt and deficits. It's not that their proposal isn't better - it is that they quite literally have NOTHING to propose.

I have heard absolutely nothing - NOTHING - from the Democrats or the President or any of the high-powered academic liberals that would solve this problem. Taxing the rich more does not solve the problem. Proposing budgets - as Obama has just  done - that don't cut federal spending does not solve the problem. Offhandedly dismissing warnings from the IMF and the S&P rating group doesn't solve the problem.  Ignoring the precipitous slide in the value of the dollar over the past few months doesn't solve the problem.

Ryan's proposal does have its flaws, and a rational debate about how to improve it would be useful to the nation. Outright war on the proposal with no credible alternative offered - as we are seeing from the Democrats - is downright irresponsible, not to say childish. Apparently the old saw that Democrats are the "tax and spend" party is still true.

An interesting budget chart

John Taylor has an article, Obama's Permanent Spending Binge, over on today's Wall Street Journal opinion page. It includes an interesting chart:

This chart makes it perfectly clear that despite eloquent words President Obama and the Democrats are STILL not yet serious about cutting the deficit. I notice that the White House was quick to try to "spin" the S&P ratings warning a couple of days ago, claiming that things weren't really that bad.  And they are pretending they don't notice the steady fall in the dollar on world markets over the past month or two.

And then in a further unfathomable step, President Obama has commissioned YET ANOTHER deficit study group, to be led by Vice-President Biden, even though he ignored completely the recommendations of the last deficit study commission he chartered, and has been ignoring completely the work of the "gang of six" Senators that have been working on a bipartisan plan for months.

Republican representative Ryan's proposal (labeled the "House Budget" in the chart) certainly has some flaws (largely the refusal to raise taxes), but at least it deals with the real problem. I'm no fan of the Republicans these days, nor of their tendency to confuse the critical debt and deficit issues with all sorts of minority ideological side issues like abortion and funding for NPR, but at least they are in the ball park with their budget proposals.

Now reality begins to set in

Los Angeles – Despite growing concerns about the country’s long-term fiscal problems and an intensifying debate in Washington about how to deal with them, Americans strongly oppose some of the major remedies under consideration, according to a new Washington Post-ABC News poll.

The survey finds that Americans prefer to keep Medicare just the way it is. Most also oppose cuts in Medicaid and the defense budget. More than half say they are against small, across-the-board tax increases combined with modest reductions in Medicare and Social Security benefits. Only President Obama’s call to raise tax rates on the wealthiest Americans enjoys solid support.

I love it. Americans are worried about the deficit and the debt, but in fact oppose any effective actions to solve either problem. I agree with S&P -- a one in three chance we won't be able to get our act together to address either problem. Well, if we won't solve the problem voluntarily, the world markets will solve it for us, at considerably more cost and pain to us then a proactive plan would produce.

Recommended: Does anyone actually know how to fix the economy?

An interesting and well argued posting, Does anyone actually know how to fix the economy?, has appeared today on the www.salon.com/ site. The author sees four basic approaches in current discussions, which he labels as the approaches of the supply-side conservatives, fiscal conservatives, neoliberals and progressives.  He then discusses how each of these groups propose to fix the economy, and the problems with their approaches.

I think he has correctly identified the viewpoints and their problems, and I agree with his argument that none of them is adequate.  This article is well worth reading and pondering..

I would only add a general observation. Many of these approaches rely one way or another on "government experts" to make decisions about how the economy ought to operate and where major investment ought to be made. But there is nothing in the long history of civilizations to support the assertion that a few government bureaucrats, however well educated, make better decisions than a true free market system, messy as it is.  I would have thought the painful examples of a number of recent "central planning" socialist and communist economies around the world would have driven that lesson home, but apparently many in the Washington political elite still subscribe to that fantasy.

An interesting question

Yesterday I had a discussion with one friend about expectations of children.  In particular, we both noted that when we were children our parents expected us to take responsibility for our own happiness, and much of our own entertainment. If we were bored, it was our own fault. Many of today’s parents apparently worry incessantly about keeping their children entertained, buying them toys and iPods and computers and ferrying them to an endless stream of soccer practices, dance lessons, piano lessons and the like. 

Similarly, I recall as a child always having household chores I was expected to do – take out the garbage, feed the chickens (we lived for a time on a farm), mow the lawn, etc, etc. It seems to me the idea that children ought to contribute to and be responsible for some of the family chores is a foreign concept to many parents these days.

This led to another discussion with another friend about the growing “entitlement” sense in today’s America. And related to it, the current popular concept that if something bad happens to one, someone else is to blame and ought to be sued.  

All of which leads me to an interesting question. The solution to our nation’s burgeoning debt problem inevitably will require national sacrifice in the form of higher taxes and reduced services from the federal government. In World War II Americans were quite willing to sacrifice and accept rationing and higher taxes, collect scrap metal, and work long hours in munitions factories. Yet today’s politicians - Democrat and Republican alike - are clearly deathly afraid of asking the nation for any sacrifice.  We are running 2 (2 and 1/2, if one counts Libya) wars, and a huge national debt, yet neither the Bush nor the Obama administration has asked Americans for even token sacrifices.

The question is: are today’s American willing to accept significant sacrifice for the long-term good of the nation or not?  Are politicians right to fear asking any sacrifice of us, or are they selling today’s American’s short?  I realize that I don’t know the answer to this question. I would accept – even expect – such sacrifice if it increased the odds my children and grandchildren would have a better life, and I suspect (though can’t prove) that most of my generation would feel the same. But what about the generations below me, who make up the majority of the voting public?  Have they really become as hedonistic and short-sighted as Washington politicians seem to think, or are they made of sterner stuff?

An interesting question, and one with a high degree of relevance as Congress struggles to find a politically acceptable solution to the federal debt problem.

Recommended: Ultimate Spoiler Alert

David Brooks had another one of his insightful Op Ed pieces, Ultimate Spoiler Alert, in the April14 New York Times.Worth reading.

One has to hope that the "gang of six" in the Senate, the three Republicans and three Democrats who have been meeting privately for weeks to hammer out a realistic bipartisan approach to the debt problem can produce something that Congress will at least seriously consider. If not, then apparently no one on either side of the aisle is prepared to do what it takes to address the real problems, and we as a nation will be in a world of hurt.

Recommended: Taxes and Politics

Thomas Sowell, the well-known Stanford economist, has another of his hard-headed commentaries over on the RealClearPolitics site this morning: Taxes and Politics. Well worth reading. I suppose it is simply the nature of the average human mind, but I am always surprised at how resistant people are to data and facts if they contradict their ideological outlook.

In general, I think liberals need to rethink their historical antipathy toward business and wealth.  There is only one possible reliable long-term source of the revenue they need to support the liberal programs they would like, and that is successful businesses and successful taxpayers. Rather than being perennially hostile to "business" and "the rich", they need to come to understand that these are the geese that lay the golden eggs they would like to harvest.  The world is global these days - make the taxes too high and business and investment will simply go somewhere else in the world that is more attractive, taking the profits, tax revenues and jobs with them..  That isn't rocket science, but it does seem to be beyond the comprehension of many of our politicians.

See where your tax dollars went

Ever wondered how much the Middle East wars are costing you, or how much your portion of the bailout was?  Go to Third Way and plug in how much taxes you paid in 2010 and you will get a "taxpayer's receipt" breaking down how your tax dollars were distributed.

Look at the categories and ask yourself if you would have chosen to pay that much for each service if you were given the choice.  it is an interesting exercise.

Recommended: Dems and Taxes: Trapped by Talking Points

Carl Cannon has an interesting post today on the RealClearPolitics site, Dems and Taxes: Trapped by Talking Points. Neither the Republican nor the Democrats have yet arrived at reality. Republicans need to face up to the fact that taxes have to go up on everyone, unless they are willing to bite the bullet and reform the tax code, removing all the tax exemptions (a good idea, but it means taking exemptions away from lots of their business supporters). Democrats need to get over the fantasy that just taxing the rich more will solve the problem - some of their cherished social welfare programs will have to go too in order to get spending down to rational levels again.

Recommended: The Presidential Divider

Reaction this morning to President Obama's speech last night is predictably partisan, with liberals asserting that he walked on water (again) and conservatives claiming he is the anitchrist (again). Among all this partisan clamor, the best review I can find this morning is The Presidential Divider (a play, I guess, on President Bush's "I'm the decider" comment) in The Wall Street Journal. Not that the Journal is ever a friend of this president, but the assessment of his speech seems to me fairly accurate, if unfriendly..

President Obama's speech - more of the same...

It seemed to me that President Obama had a clear shot, with his Wednesday night speech, to stake out a detailed position on how he and his fellow Democrats propose to reduce the deficit and begin paying down the huge federal debt we have accumulated. The Republicans had fired their shot, with Representative Ryan's detailed proposal, Obama had shown some (grudging) flexibility in the recent 2010 budget extension agreement, and he had the political cover that a  majority of the nation is seriously concerned about the debt. Now would have been the ideal time for a true statesman to take a leadership position.

Unfortunately, what we got was vintage Obama -- lots of eloquent words but little substance, no detail, and a rehash of the standard Democratic "tax the rich" rhetoric.  I guess it is pretty clear that if anyone is going to attack this debt problem realistically, it isn't going to be Obama, who seems to prefer being a politician to being a leader. I suppose he and his advisers think that his re-election chances are better if he "stays above the fray" and lets Pelosi and Reid fight the hard battles, and perhaps they are right.  But what a disappointment......!

Recommended: Dispelling myths in the Obama Wars

There is an interesting post over on the liberal The Daily Kos blog from Monday: Dispelling myths in the Obama Wars. It seems to me to be a good, hard-headed, pragmatic assessment of the Obama administration from a liberal perspective, and worth reading.

What we really need

Now that President Obama has (finally!!) waded into the debt issue, we can see the outlines of how this battle will go. Republicans will want to cut everything but defense, and under no circumstances raise taxes, arguing that raising taxes will bring the economic recovery to a halt. And of course they will protect all the billions of federal handouts and tax exemptions to businesses.  Democrats will deluge us with the specter of starving babies and homeless poor as a justification for continuing every possible transfer payment and welfare program, and will press to tax “the rich” to the maximum.

But there is no way we can continue to support massive transfer payments using borrowed money, no matter how "moral" or useful or effective they may be -- we simply can't afford them. And there is no way we can reduce the deficit without raising taxes -- on everyone, not just "the rich".  "The rich", if we expropriated everything they own, would not provide enough cash alone to close the deficit or pay down the federal debt.

Both approaches are stupid, as most of their proponents probably well know, but they play well to their respective bases, and since in Washington getting re-elected  and staying in power is far more important that doing what the nation really needs, they will stick to this strategy.

What does the nation really need, and what would smart statesmen do (if we had any real statesmen in Washington)? For a start I would suggest:

 

1. Get us out of ALL our wars immediately. Wars are a wildly-expensive rat hole down which we are pouring trillions of dollars that should be spent in the US repairing and upgrading infrastructure, funding innovation, and improving the education of our young. Bombs and missiles keep defense contractors rich, but do absolutely nothing to increase the competitiveness or long-term health of our economy. This doesn’t mean we shouldn’t fund and maintain a strong military – the world is not a benign place. But we ought not to deploy that military except where truly critical national interests are involved.

2. Drop ALL subsidies. Subsidies distort markets, as can be seen, for example, by what the corn ethanol subsidies have done to agriculture. Subsidies are just a politically-acceptable way for Congress to shovel federal money to favored businesses.

3. Simplify the tax code and drop almost ALL tax exemptions. It is outrageous that companies that make billions in profits pay no taxes. Exemptions that truly encourage innovation, entrepreneurship or education might be worth keeping  

4. One way or another, immediately cut federal spending enough (by at least about $2 trillion per year) so that the debt is at least no longer increasing.

5. Rethink Medicare from the ground up. It simply can’t continue as it is – it will bankrupt the nation. Minor tinkering won’t fix the problem. The whole system needs to be rethought from the ground up.  The incentives – for doctors, for hospitals, for drug companies and for patients – are all wrong. There are insufficient market incentives to control the costs.  In fact, in the current system there are almost no incentives to control costs.

6. Reform the Senate. Congress failed to pass a budget in time despite being entirely controlled by the Democrats, and a dysfunctional Senate was the primary reason. The Senate is supposed to act more slowly and with more deliberation than the House, but the current paralysis is ridicules. Term limits for Senators would be a good start – say a two-term limit so this doesn’t become a lifetime occupation for politicians.

The double standard - again!

Hamas fired an anti-tank weapon against a school bus in Israel last week, critically injuring a student (fortunately the school bus only had that one student still aboard).  Was the world press up in arms against Palestinian terrorists firing an anti-tank weapon against a school bus?  No. Did it get much play in the press?  No.  But if the Israelis happen by accident to hit a Palestinian child, what do you think the press would do with that?

So is this budget deal a big deal, really?

 Both sides are now claiming great success in the budget negotiations (including, ironically,  the Democrats and President Obama, who fought it tooth and nail).  Is this really a great accomplishment?

Let’s put this deal in context.  Here is a small table (you can find the original at http://www.whitehouse.gov/omb/budget/Historicals) with the federal outlays and deficit/surplus (in millions) for the past ten years, including both on-budget and off-budget outlays (since Congress likes to hide some costs off budget):

Fiscal Year	Receipts	Outlays	Deficit/Surplus
2000	2,025,191	1,788,950	236,241
2001	1,991,082	1,862,846	128,236
2002	1,853,136	2,010,894	-157,758
2003	1,782,314	2,159,899	-377,585
2004	1,880,114	2,292,841	-412,727
2005	2,153,611	2,471,957	-318,346
2006	2,406,869	2,655,050	-248,181
2007	2,567,985	2,728,686	-160,701
2008	2,523,991	2,982,544	-458,553
2009	2,104,989	3,517,677	-1,412,688
2010	2,162,724	3,456,213	-1,293,489

Notice the huge $1 TRILLION dollar increase in the annual deficit beginning in 2009, when the Obama administration came in. Notice also that federal outlays jump about half a trillion dollars beginning in 2009.

So in the face of this, does a $39.5 billion dollar cut seem like much?  True, it is better than nothing (and certainly more than the Democrats were willing to consider when this fight started), but despite all the ballyhoo it isn’t a drop in the bucket compared to the half trillion dollar increase in outlays that the Obama administration put in place in 2009. In fact, it is only about a 7% reduction in the half-trillion dollar INCREASE the the Obama administration put in place in 2009. I'd hardly call that much of an accomplishment!

Unfair attacks

Paul Krugman, the Noble Prize winning economist who has been trumpeting the liberal economic views recently, has an Op Ed in today's New York Times entitled Ludicrous and Cruel, in which he savagely attacks Republican Representative Paul Ryan's budget proposal. What is interesting is that while he details all sorts of things that are wrong with Ryan's proposal, he doesn't offer any serious counter proposal at all.  No doubt the Ryan proposal is flawed, but it at least addresses the magnitude of the deficit problem realistically.

It is notable that liberals like Krugman are apparently still in complete denial about the debt problem. Even President Obama's 2012 budget proposal, despite some words about cutting programs, really just locked in the substantial increases in federal spending that he put in place in his last budget. Deciding what to cut will be difficult, and requires a serious national debate, but it can hardly get started if the Democrats are determined to cut nothing.

What is a “safe” level of federal debt?

The majority of Americans (except, perhaps, Washington politicians) now believe that our federal debt is too high, agreeing with the vast majority of professional economists worldwide. Some debt is acceptable, indeed even useful. Federal treasury bonds (what our debt amounts to) serve a useful purpose in the world to maintain monetary liquidity. But at the moment our Federal debt is just shy of 100% of our national GDP, or put another way, we owe about as much as the entire nation produces in goods and services in an entire year.

To have a rational argument about how much to cut the federal budget, we need to know how much we need to cut.  Clearly we need to cut the entire annual deficit – somewhere between $1.6 and $2 trillion dollars depending on whom one asks – so that the total debt stops increasing.. But in fact we need to cut more than that to begin to pay down the excessive debt we have already accumulated. So how much of our current debt do we need to shed to get back to a “safe” level?  Clearly the safe level is related to the size of the economy (the Gross Domestic Product, or GDP). A larger economy can sustain and service a larger debt.  Here is a chart of the historical US debt ot GDP ratio over the past 200 years:

In general, economists seem to think something in the range of 50% of GDP is a “safe” and acceptable level of federal debt. That suggests that in addition to cutting the annual federal budget by at least $1.6 to $2 trillion dollars, we need to cut enough above that to shed about ½ of $14 trillion = $7 trillion in current debt. Of course we can’t pay it off all at once, so if we paid it off over 10 years we need to cut an additional $7 trillion/10 = $700 billion per year. So the rational target for next year’s federal budget ought to be to reduce it by about $1.6 to $2 trillion plus $700 billion, or something in the range of $2.5 trillion dollars. That would stop the debt from increasing and begin to pay us down to a safe level over the next decade. These are rough calculations, of course, but they give a ballpark estimate of what is really needed.

So far only Republican Representative Paul Ryan has proposed anything that even approaches what is really needed. Most other Republicans are playing political theater with these “piddling” proposals of $30-60 billion in cuts, nowhere near enough to make any real difference. Democrats are in full-fledged denial that there is even a problem, and the President has done absolutely nothing to address the issue, apparently relying on his “hands off” approach to try and insulate him politically from the painful choices that will have to be made.

So the question is, can we the American people face up to the painful choices that need to be made?  Politicians, of course, will paint the direst possible picture – little babies going hungry if we don’t fund every current program at its current level.  But in fact we the public need to get real about what is really important.  Is it more important to spend $500 million to intervene in Libya or spend that $500 million on education in the US? Is it more important to blow $2 billion per week on the Iraq war or put that $2 billion per week to repairing our nation’s dilapidated bridges and roads?  If we really want every possible medical service covered under Medicare, are we willing to accept a 30% hike in our federal taxes? Etc, etc, etc.  These are the hard questions that ought to be at the center of the national debate today, not whether a trivial $61 billion cut in this years federal budget is “extreme”.

Come on, Congress, get real!!!!

Democrats appear ready to give in to cuts in the $30-40 billion range to avoid a government shutdown.  The most "extreme" Tea Party Republicans want about $61 billion in cuts for the remainder of the fiscal year.  Is this extreme? Actually even the "extreme" $61 billion target is only about 4% of this year's federal deficit. Even the "extreme" proposal is chump change in the face of the real deficit -- rearranging the deck chairs on the Titanic as it sinks!!!

Clearly neither party is dealing with the real issue, nor is the president.  This is all political theater -- nothing effective is being proposed by the Republicans, and the Democrats are being dragged kicking and screaming even to this meaningless token compromise.

How does President Obama stack up for re-election?

Since President Obama is beginning his re-election campaigning, it seems appropriate to assess how well he has done to date. There have, of course, been a lot of local, short-term issues he has had to handle, and by and large he has done pretty well with most of those, and where he has made an occasional misstep he seems to have learned quickly. And he continues to be personally likable, impressively erudite, and a good speaker.

He has had three major issues to deal with in his first term, in my opinion: (1) the economy, (2) the two wars, and (3) the exploding federal deficit.  So how has he done on these major issues?

(1)   On the economy, when he should have been focused like a laser on getting unemployment down and the economy moving again, he instead wasted a whole year and a lot of political capital fighting to get the health care bill passed. Leave aside the question of whether the resulting bill did what it was supposed to do, I give him a D for putting his effort toward a liberal ideological goal rather than the urgent practical goal of restoring the economy. Restoring the economy is a difficult and complex task, and economists are sharply divided about the best approach to take, so I wouldn’t have marked him down much if what he tried hadn’t worked very well so long as he was spending most of his effort trying something – I do mark him down heavily for not putting that effort first and foremost in his agenda.

(2)   On the two wars in the Middle East one must first admit that there is no easy solution. Perhaps we should never have gone into Iraq or Afghanistan, but that was not his choice. We are in, and getting out is not easy.  I give him a B- for his efforts thus far. He hasn’t done anything unreasonable, but neither has he developed and enunciated (ie – sold to the American people) a coherent long-term strategy.  And his actions to involve us in Libya , I think, reflect a kind of ad-hoc approach to Middle east policy that is highly dangerous to our long-term interests.

(3)   On the issue of the exploding federal deficit, I give him an outright failure, an F. He says more or less the right words, but almost every action he has taken, from the bailout to the health  care bill to the 10+% increase in federal agencies budgets that he pushed through in his first budget, has in fact made the problem worse.  He appears willing to grudging give in to a token $30-40 billion decrease, which is pocket change in the $2 trillion annual deficit.  Where he should as president  be leading the effort to control the federal deficit, he is instead becoming an obstacle to finding a solution.

All in all, much as I like President Obama personally, I don’t think I would vote for his re-election unless the Republicans put up a truly unsuitable alternative. (which they might just do!). Based on his first term thus far, I think President Obama (and/or his advisors, which for practical purposes is the same thing) is too committed to his liberal ideological goals to deal practically and effectively with the major issues we face.