By John Stossel
In America today, the biggest recipients of handouts are not poor people. They're corporations.
General Electric CEO Jeffrey R. Immelt is super-close to President Obama. The president named Immelt chairman of his Council on Jobs and Competitiveness. Before that, Immelt was on Obama's Economic Recovery Advisory Board. He's a regular companion when Obama travels abroad to hawk American exports. (Why does business need government to do that?)
"Jeff Immelt is perhaps the CEO who is most cozy with President Obama," says journalist Tim Carney. "General Electric is structuring their business around where government is going ... high-speed rail, solar, wind. GE is lining up to get what government is handing out."
Businesses love to have government as their partner. There's safety in it. Why take chances in a marketplace full of fickle consumers and investors, when you can get secure money and favors from the taxpayers? It's an old story, and free-market advocates as far back as Adam Smith warned against it. Unfortunately, too many people think "free market" means pro-business. It doesn't. Free market means laissez faire -- prohibit force and fraud, but otherwise leave the marketplace alone. No subsidies, no privileges, no arbitrary regulations. Competition is the most effective regulator.
Left-wingers criticize corporate welfare until it's for something they like -- for example, "green technology."
"The government's going to invest in certain companies to pioneer new technologies. That, I think, is not corporate welfare," says Tamara Draut of the Progressive think-tank Demos.
I asked her if business is too dumb to pioneer without government direction.
"The private sector will only invest if they know for sure that there is a commercial marketplace."
But if everyone wants these products, that should be an incentive for greedy businesses to make them.
"Not always," she replied. "But the free market does not know anything unless we all collect our interests and say: This is of national import to us."
This is nonsense. How did Apple know we would want iPods, iPhones and iPads? It didn't know with certainty. It took a risk with its own and investors' money.
But for some reason, other products and services are different, according to people like Obama and Draut.
"We desperately need high-speed rail in this country," she says, meaning the taxpayers must be forced to finance it.
The government gives companies billions of dollars to develop new trains. Guess who receives some of that money.
The problem is that government has no wealth of its own. All it can do is move wealth from where the market would have channeled it to where politicians want it. Who knows what would have happened if free people had the money that goes to high-speed rail? Maybe cancer would have been cured.
"The private sector isn't going to cure cancer by itself," Draut says.
Greedy drug companies aren't going to cure cancer? I asked.
"They would have by now, if they could."
People with a central planner's mentality have what F.A. Hayek called "the fatal conceit."
I'd have thought the fall of the Soviet Union would have taught us that central planning is destructive, but the conceit of the central planners lives on. Maybe the problem isn't merely economic ignorance. Maybe it's something more sinister: a wish to keep the freeloading system going. After all, if politicians and business leaders admit that government cannot play a constructive role in the economy, what grounds would there be for subsidies, shelter from competitors and other privileges at the people's expense? The anti-free-market ideology is a vast rationalization for favoritism.
The favors, of course, go those who are best at lobbying for them, those with connections and the means to make big campaign contributions. So the government pours billions of taxpayer dollars into wind farms that are half-owned ... by GE.
I bet it's a waste of money.
"Well, maybe it is," Draut says. "But it should be one thing that we, as a nation, are investing in so that we aren't left behind."
This sort of nonsense provides intellectual cover for privilege and crony capitalism.
By Robert Samuelson
WASHINGTON -- If you've wondered why it's so hard to subdue budget deficits, you should consult a new study from the Congressional Budget Office called "Reducing the Deficit: Spending and Revenue Options" (free at www.cbo.gov). You'll learn from its 240 pages that the deficits definitely can be curbed. The CBO presents 105 policies (it doesn't endorse them) that would shrink deficits by trillions of dollars over the next decade. You'll also learn -- surprise! -- that most choices are political poison.
Suppose we increased the federal gasoline tax by 25 cents a gallon, from 18.4 cents to 43.4 cents. That would raise $291 billion over the decade from 2012 to 2021, estimates the CBO. Or we could advance the ages for early and full Social Security benefits; one suggestion is to raise them (now 62 and 66) by two months a year until reaching predetermined targets (say, 64 and 70). The CBO reckons the decade's savings at about $264 billion. How about slowly moving Medicare's eligibility age from 65 to 67. The savings: $125 billion.
Are we finished? Nowhere near. At most, these crowd pleasers would make noticeable dents. Recall that the deficits total almost $10 trillion over the next decade under President Obama's original 2012 budget. That's the point: even discounting the effects of the deep recession, prospective deficits are so large that they can't be cured by tinkering. We should be asking basic questions:
-- How big a government do we want? For four decades, federal spending has averaged 21 percent of gross domestic product. An aging population and high health costs mean that average spending, as a share of GDP, will rise by a third or more in the next 10 to 15 years if today's programs simply continue.
-- Who deserves government subsidies and how much? About 55 percent of spending goes to individuals, including the elderly, veterans, farmers, students, the disabled and the poor.
-- How much, if at all, should social spending be allowed to squeeze national defense?
-- If taxes rise, how much and on whom? What taxes would least hurt economic growth?
We aren't having this debate, and President Obama is mainly to blame. His recent budget speech at George Washington University was a telling model of evasion, contradiction and deception. He warned that by 2025 present tax levels would suffice only to pay for "Medicare, Medicaid, Social Security and the interest we owe on our debt. ... Every other national priority -- education, transportation, even our national security -- will (be paid) with borrowed money." He noted that businesses may not invest in a country that seems "unable to balance its books."
Fine. But Obama has no plan to balance the budget -- ever. He asserted "every kind of spending (is) on the table." But every kind of spending is not on the table. He virtually ruled out cutting Social Security, the government's biggest program (2011 spending: $727 billion). For example, Social Security is excluded from a proposed "trigger" that would automatically reduce spending and raise taxes if certain deficit targets weren't met. He also put Medicare (2011 spending: $572 billion) largely off-limits.
The president keeps promoting an "adult conversation" about the budget, but that can't happen if the First Adult doesn't play his part. Obama is eager to be all things to all people. He's against the debt and its adverse consequences, but he's for preserving Social Security and Medicare without major changes. He's for "tough cuts," but he's against saying what they are and defending them. He pronounces ambitious goals without saying how they'd be reached. Mainly, he's for scoring political points against Republicans.
Deficit politics are inherently unpopular. One way -- maybe the only way -- to break today's deadlock is to alter public opinion so that some government benefits are seen as unnecessary or illegitimate and some taxes are seen as fair burden-sharing.
Given better health, longer life expectancy and wealthier elderly, why shouldn't Social Security and Medicare eligibility ages be raised and means-testing broadened? The president doesn't broach this debate. Farmers receive about $15 billion a year in crop subsidies to help offset the insecurities of weather and fluctuating prices. Considering that volatile markets impose similar insecurities on many Americans, why do farmers deserve special protection? The president doesn't engage that debate. Might not a higher gasoline tax reduce budget deficits and oil imports? Obama is silent there, too.
All this may be politically shrewd. Voters disdain hard choices. Liberal pundits loved Obama's speech. But another audience is less impressed -- global money managers. The Financial Times' respected columnist Gillian Tett recently asked whether the administration's "reassuring patter on debt" could be believed. Not entirely, she concluded. Shortly thereafter, Standard & Poor's warned that it might downgrade U.S. government debt. Obama is flirting with trouble, even if he doesn't realize it.
By Thomas Sowell
Walter Williams fans are in for a treat-- and people who are not Walter Williams fans are in for a shock-- when they read his latest book, "Race and Economics."
It is a demolition derby on paper, as Professor Williams destroys one after another of the popular fallacies about the role of race in the American economy.
I can still vividly recall the response to one of Walter's earliest writings, back in the 1970s, when he and I were working on the same research project in Washington. Walter wrote a brief article that destroyed the central theme of one of the fashionable books of the time, "The Poor Pay More."
It was true, he agreed, that prices were higher in low-income minority neighborhoods. But he rejected the book's claim that this was due to "exploitation," "racism" and the like.
Having written a doctoral dissertation on this subject, Walter then proceeded to show why there were higher costs of doing business in many low-income neighborhoods, and that these costs were simply passed on to the consumers there.
What I remember especially vividly is that, in reply, someone called Walter "a white racist." Not many people had seen Walter at that time. But it was also a sad sign of how name-calling had replaced thought when it came to race.
The same issue is explored in Chapter 6 of "Race and Economics." The clinching argument is that, despite higher markups in prices in low-income neighborhoods, there is a lower than average rate of return for businesses there-- one of the reasons why businesses tend to avoid such neighborhoods.
My own favorite chapter in "Race and Economics" is Chapter 3, which I think is the most revealing chapter in the book.
That chapter begins, "Some might find it puzzling that during times of gross racial discrimination, black unemployment was lower and blacks were more active in the labor force than they are today." Moreover, the duration of unemployment among blacks was shorter than among whites between 1890 and 1900, whereas unemployment has become both higher and longer-lasting among blacks than among whites in more recent times.
None of this is explainable by what most people believe or say in the media or in academia. But it is perfectly consistent with the economics of the marketplace and the consequences of political interventions in the marketplace.
"Race and Economics" explains how such interventions impact blacks and other minorities, whether in housing markets, the railroad industry or the licensing of taxicabs-- and irrespective of the intentions behind the government's actions.
Minimum wage laws are classic examples. The last year in which the black unemployment rate was lower than the white unemployment rate was 1930. That was also the last year in which there was no federal minimum wage law.
The Davis-Bacon Act of 1931 was in part a result of a series of incidents in which non-union black construction labor enabled various contractors from the South to underbid Northern contractors who used white, unionized construction labor.
The Davis-Bacon Act required that "prevailing wages" be paid on government construction projects-- "prevailing wages" almost always meaning in practice union wages. Since blacks were kept out of construction unions then, and for decades thereafter, many black construction workers lost their jobs.
Minimum wages were required more broadly under the National Industrial Recovery Act of 1933 and under the Fair Labor Standards Act of 1938, with negative consequences for black employment across a much wider range of industries.
In recent times, we have gotten so used to young blacks having sky-high unemployment rates that it will be a shock to many readers of Walter Williams' "Race and Economics" to discover that the unemployment rate of young blacks was once only a fraction of what it has been in recent decades. And, in earlier times, it was not very different from the unemployment rate of young whites.
The factors that cause the most noise in the media are not the ones that have the most impact on minorities. This book will be eye-opening for those who want their eyes opened. But those with the liberal vision of the world are unlikely to read it at all.
By Caroline Glick
If only in the interest of intellectual hygiene, it would be refreshing if the Obama administration would stop ascribing moral impetuses to its foreign policy.
Today, US forces are engaged in a slowly escalating war on behalf of al-Qaida penetrated antiregime forces in Libya. It is difficult to know the significance of al-Qaida's role in the opposition forces because to date, the self-proclaimed rebel government has only disclosed 10 of its 31 members.
Indeed, according to The New York Times, the NATO-backed opposition to dictator Muammar Gaddafi is so disorganized that it cannot even agree about who the commander of its forces is.
And yet, despite the fact that the Obama administration has no clear notion of who is leading the fight against Gaddafi or what they stand for, this week the White House informed Congress that it will begin directly funding the al-Qaida-linked rebels, starting with $25 million in non-lethal material.
This aid, like the NATO no-fly zone preventing Gaddafi from using his air force, and the British military trainers now being deployed to Libya to teach the rebels to fight, will probably end up serving no greater end then prolonging the current stalemate. With the Obama administration unwilling to enforce the no-fly zone with US combat aircraft, unwilling to take action to depose Gaddafi and unwilling to cultivate responsible, pro-Western successors to Gaddafi, the angry tyrant will probably remain in power indefinitely.
In and of itself, the fact that the war has already reached a stalemate constitutes a complete failure of the administration's stated aim of protecting innocent Libyan civilians from slaughter.
Not only are both the regime forces and the rebel forces killing civilians daily. Due to both sides' willingness to use civilians as human shields, unable to separate civilians from military targets, NATO forces are also killing their share of civilians.
In deciding in favor of military intervention on the basis of a transnational legal doctrine never accepted as law by the US Congress called "responsibility to protect," President Barack Obama was reportedly swayed by the arguments of his senior national security adviser Samantha Power. Over the past 15 years, Power has fashioned herself into a celebrity policy wonk by cultivating a public persona of herself as a woman moved by the desire to prevent genocide. In a profile of Power in the current issue of the National Journal, Jacob Heilbrunn explains, "Power is not just an advocate for human rights. She is an outspoken crusader against genocide..."
Heilbrunn writes that Power's influence over Obama and her celebrity status has made her the leader of a new US foreign policy elite. "This elite," he writes, "is united by a shared belief that American foreign policy must be fundamentally transformed from an obsession with national interests into a broader agenda that seeks justice for women and minorities, and promotes democracy whenever and wherever it can - at the point of a cruise missile if necessary."
As the prolonged slaughter in Libya and expected continued failure of the NATO mission make clear, Power and her new foreign policy elite have so far distinguished themselves mainly by their gross incompetence.
But then, even if the Libyan mission were crowned in success, it wouldn't make the moral pretentions of the US adventure there any less disingenuous. And this is not simply because the administration-backed rebels include al-Qaida fighters.
The fact is that the moral arguments used for intervening militarily on behalf of Gaddafi's opposition pale in comparison to the moral arguments for intervening in multiple conflicts where the Obama administration refuses to lift a finger. At a minimum, this moral inconsistency renders it impossible for the Obama administration to credibly embrace the mantel of moral actor on the world stage.
Consider the administration's Afghanistan policy.
Over the past week, the White House and the State Department have both acknowledged that administration officials are conducting negotiations with the Taliban.
Last week, US Secretary of State Hillary Clinton defended the administration's policy. During a memorial service for the late ambassador Richard Holbrooke, who at the time of his death last December was the most outspoken administration figure advocating engaging Mullah Omar and his followers, Clinton said, "Those who found negotiations with the Taliban distasteful got a very powerful response from Richard - diplomacy would be easy if we only had to talk to our friends."
Of course, the Taliban are not simply not America's friends. They are the enemy of every good and decent human impulse. The US went to war against the Taliban in 2001 because the Bush administration rightly held them accountable for Osama bin Laden and his terror army which the Taliban sponsored, hosted and sheltered on its territory.
But the Taliban are America's enemy not just because they bear responsibility for the September 11 attacks on the US. They are the enemy of the US because they are evil monsters.
Apparently, the supposedly moral, anti-genocidal, pro-women Obama administration needs to be reminded why it is not merely distasteful but immoral to engage the Taliban. So here it goes.
Under the Taliban, the women and girls of Afghanistan were the most oppressed, most terrorized, most endangered group of people in the world. Women and girls were denied every single human right. They were effectively prisoners in their homes, allowed on the streets only when fully covered and escorted by a male relative.
They were denied the right to education, work and medical care. Women who failed to abide in full by these merciless rules were beaten, imprisoned, tortured, and stoned to death.
The Taliban's barbaric treatment of women and girls probably couldn't have justified their overthrow at the hands of the US military. But it certainly justified the US's refusal to even consider treating them like legitimate political actors in the 10 years since NATO forces first arrived in Afghanistan. And yet, the self-proclaimed champions of the downtrodden in the administration are doing the morally unjustifiable. They are negotiating, and so legitimizing the most diabolical sexual tyranny known to man. Obama, Clinton, Power and their colleagues are now shamelessly advancing a policy that increases the likelihood that the Taliban will again rise to power and enslave Afghanistan's women and girls once more.
Then there is Syria. In acts of stunning courage, despite massive regime violence that has killed approximately two hundred people in three weeks, anti-regime protesters in Syria are not standing down. Instead, they are consistently escalating their protests. They have promised that the demonstrations after Friday prayers this week will dwarf the already unprecedented country-wide protests we have seen to date.
In the midst of the Syrian demonstrators' calls for freedom from one of the most repressive regimes in the Middle East, the Obama administration has sided with their murderous dictator Bashar Assad, referring to him as a "reformer."
As Heibrunn notes in his profile of Power, she and her colleagues find concerns about US national interests parochial at best and immoral at worst. Her clear aim - and that of her boss - has been to separate US foreign policy from US interests by tethering it to transnational organizations like the UN.
Given the administration's contempt for policy based on US national interests, it would be too much to expect the White House to notice that Syria's Assad regime is one of the greatest state supporters of terrorism in the world and that its overthrow would be a body blow to Iran, Venezuela, Hezbollah, Hamas, Islamic Jihad and al-Qaida and therefore a boon for US national security.
The Syrian opposition presents the likes of Obama and Power with what ought to be a serious moral dilemma. First, they seem to fit the precise definition of the sort of people that the transnationalists have a responsibility to protect.
They are being gunned down by the dozen as they march with olive branches and demand change they can believe in. Moreover, their plan for ousting Assad involves subordinating him to the transnationalists at the UN.
According to a report last week in The Washington Times, Washington-based representatives of several Syrian opposition groups have asked the administration to do three things in support of the opposition, all of which are consonant with the administration's own oft stated foreign policy preferences.
They have requested that Obama condemn the regime's murderous actions in front of television cameras. They have asked the administration to initiate an investigation of Assad's murderous response to the demonstrations at the UN Human Rights Council. And they have asked the administration to enact unilateral sanctions against a few Syrian leaders who have given troops the orders to kill the protesters.
The administration has not responded to the request to act against Assad at the UN Human Rights Council. It has refused the opposition's other two requests.
These responses are no surprise in light of the Obama administration's abject and consistent refusal to take any steps that could help Iran's pro-democracy, pro-women's rights, pro-Western opposition Green Movement in its nearly two-year-old struggle to overthrow the nuclearproliferating, terror-supporting, genocide-inciting, elections-stealing mullocracy.
Power's personal contribution to the shocking moral failings of the administration's foreign policy is of a piece with her known hostility towards Israel. That hostility, which involves a moral inversion of the reality of the Palestinian war against Israel, was most graphically exposed in a 2002 interview. Then, at the height of the Palestinian terror war against Israel, when Palestinian terrorists from Hamas and Fatah alike were carrying out daily attacks whose clear aim was the massacre of as many Israeli civilians as possible simply because they were Israelis, Power said in a filmed interview that she supported deploying a "mammoth" US military force to Israel to protect the Palestinians from the IDF.
In periodic attempts to convince credulous pro-Israel writers that she doesn't actually support invading Israel, Power has claimed that her statements calling for just such an invasion and additional remarks in which she blamed American Jews for US support of Israel were inexplicable lapses of judgment.
But then there have been so many lapses in judgment in her behavior and in the actions of the administration she serves that it is hard to see where the lapses begin and the judgment ends. Libya, Afghanistan, Syria, Iran and Israel are only the tip of the iceberg. Everywhere from Honduras to Venezuela, from Britain to Russia, from Colombia to Cuba, Japan to China, Egypt to Lebanon, to Poland and the Czech Republic and beyond, those lapses in judgment are informing policies that place the US consistently on the side of aggressors against their victims.
Back in the pre-Obama days, when US foreign policy was supposed to serve US interests, it would have mattered that these policies all weaken the US and its allies and empower its foes. But now, in the era of the purely altruistic Obama administration, none of that matters.
What does matter is that the purely altruistic Obama foreign policy is empowering genocidal, misogynist, bigoted tyrants worldwide.
The reliably liberal New Yorker magazine isn't usually in the habit of presenting gifts to the Republican Party, but it has just published three little words that may prove central to the GOP effort to defeat President Obama next year. Those words are "leading from behind," and they appear at the end of a Ryan Lizza article on Obama's foreign policy.
Lizza didn't coin the phrase. "Leading from behind" is a direct quote from of "one of [Obama's] advisers," who is describing his boss' policy on Libya. That same adviser goes on to say that the effort to lead from behind is "so at odds with the John Wayne expectation for what America is in the world. But it's necessary for shepherding us through this phase."
And there you have it: the 2012 campaign against Obama's foreign policy in a nutshell. By the time Election Day rolls around, if the GOP knows what's good for it, the phrase "leading from behind" will be the "yes, we can" of 2012.
The reason the phrase is so devastating is that "leading from behind" wasn't intended as criticism but rather as a sympathetic, even proud, defense of the administration's approach and goals.
Lizza describes it thus: "It's a different definition of leadership than America is known for, and it comes from two unspoken beliefs: that the relative power of the US is declining, as rivals like China rise, and that the US is reviled in many parts of the world."
It is one thing to argue that the United States has made mistakes in foreign and defense policy. Everybody believes that, however deep our disagreements about what those mistakes are.
It is something entirely different, and much more profoundly serious, for a presidency to be operating on the basis that the United States can only lead if it "leads from behind" because the country's power is "declining" and because America "is reviled in many parts of the world."
Is this something that the independent voters Obama will desperately need next year will be pleased to hear? One gets the sense that they are riven with anxiety about their future and the country's future. This is not the sort of talk that will calm that anxiety.
Quite the opposite. It would, rather, seem custom-made to provoke anxiety about Obama's leadership. In the first place, "leading from behind" makes no sense logically or grammatically, so it confuses before it enlightens. And then, once you figure it out, the problems really begin.
A nation's declining power isn't like the moon's effect on the tide, caused by forces beyond our control. It is the result of actions, behaviors, ideas. If the White House truly believes the authority of the United States has suffered a decline, then its paramount responsibility is to reverse that decline.
Even for those who don't care about foreign policy, it should make little sense for the planet's most powerful nation to allow its position in the world to erode.
That erosion isn't bad news because it's good fun to be the Big Man on the World Campus. It's bad news because the continued erosion of America's influence will inexorably lead to military, strategic and economic challenges for the United States that will make the current geopolitical chessboard look like a game of Candyland.
And yet one gets the distinct sense not that Obama has been forced into the position of "leading from behind" by the circumstances in which he finds himself, but rather that he wants to "lead from behind."
In one sense, that's entirely understandable: The burdens of world leadership are exceptionally heavy at the moment, and seem quite thankless. But then, nobody told Barack Obama to run for president, and no one is telling him to run for re-election.
Of course, this article and that pithy three-word closing phrase just made that challenge significantly more difficult.
America’s Ever Expanding Welfare Empire
A fundamental misconception about America’s welfare state misleads millions of voters to reflexively support ever bigger and more generous government. William Voegeli fingers the attitude in his book, Never Enough: America’s Limitless Welfare State: “no matter how large the welfare state, liberal politicians and writers have accused it of being shamefully small” and “contemptibly austere.”
Barbara Ehrenreich expresses the attitude in her book, Nickled and Dimed: “guilt doesn’t go anywhere near far enough; the appropriate emotion is shame” regarding the stingy miserliness of America’s welfare state. In light of the current budget debate, with House Budget Committee Chairman Paul Ryan putting fundamental entitlement reform on the table, this misconception especially needs to be corrected.
America’s welfare state is not a principality. It is a vast empire bigger than the entire budgets of almost every other country in the world. Just one program, Medicaid, cost the federal government $275 billion in 2010, which is slated to rise to $451 billion by 2018. Counting state Medicaid expenditures, this one program cost taxpayers $425 billion in 2010, soaring to $800 billion by 2018. Under Obamacare, 85 million Americans will soon be on Medicaid, growing to nearly 100 million by 2021, according to the CBO.
But there are 184 additional federal, means-tested welfare programs, most jointly financed and administered with the states. In addition to Medicaid is the Children’s Health Insurance Program (CHIP). Also included is Food Stamps, now officially called the Supplemental Nutrition Assistance Program (SNAP). Nearly 42 million Americans were receiving food stamps in 2010, up by a third since November, 2008. That is why President Obama’s budget projects spending $75 billion on Food Stamps in 2011, double the $36 billion spent in 2008.
But that is not the only federal nutrition program for the needy. There is the Special Supplemental Nutrition Program for Women, Infants and Children (WIC), which targets assistance to pregnant women and mothers with small children. There is the means tested School Breakfast Program and School Lunch Program. There is the Summer Food Service Program for Children. There are the lower income components of the Child and Adult Care Food Program, the Emergency Food Assistance Program, and the Commodity Supplemental Food Program (CSFP). Then there is the Nutrition Program for the Elderly. All in all, literally cradle to grave service. By 2010, Federal spending for Food and Nutrition Assistance overall had climbed to roughly $100 billion a year.
Then there is federal housing assistance, totaling $77 billion in 2010. This includes expenditures for over 1 million public housing units owned by the government. It includes Section 8 rental assistance for nearly another 4 million private housing units. Then there is Rural Rental Assistance, Rural Housing Loans, and Rural Rental Housing Loans. Also included is Home Investment Partnerships (HOME), Community Development Block Grants (CDBG), Housing for Special Populations (Elderly and Disabled), Housing Opportunities for Persons with AIDS (HOPWA), Emergency Shelter Grants, the Supportive Housing program, the Single Room Occupancy program, the Shelter Plus Care program, and the Home Ownership and Opportunity for People Everywhere (HOPE) program, among others.
Besides medical care, food, and housing, the federal government also provides cash. The old New Deal era Aid to Families with Dependent Children (AFDC) is now Temporary Assistance for Needy Families (TANF), which pays cash mostly to single mothers with children. There is the Earned Income Tax Credit (EITC), which sends low income workers checks even though they usually owe no taxes to be credited against. The Child Tax Credit similarly provides cash to families with children. Supplemental Security Income (SSI) provides cash for the low income aged, blind and disabled. In 2010 such income security programs accounted for nearly another $200 billion in federal spending.
The federal government also provides means tested assistance through multiple programs for child care, education, job training, and the Low Income Energy Assistance Program (LIHEAP), the Social Services Block Grant, the Community Services Block Grant, and the Legal Services Corporation, among other programs.
The best estimate of the cost of the 185 federal means tested welfare programs for 2010 for the federal government alone is nearly $700 billion, up a third since 2008, according to the Heritage Foundation. Counting state spending, total welfare spending for 2010 reached nearly $900 billion, up nearly one-fourth since 2008 (24.3%).
Yet, by 2008, Robert Rector of Heritage reports that total welfare spending already amounted to $16,800 per person in poverty, 4 times as much as the Census Bureau estimated was necessary to bring all of the poor up to the poverty level, eliminating all poverty in America. That would be $50,400 per poor family of three. Indeed, Charles Murray wrote a whole book, In Our Hands, A Plan to Replace America’s Welfare State explaining that we already spend far more than enough to completely eliminate all poverty in America.
The soaring welfare spending since 2008 is not a temporary increase reflecting the recession, as it is not projected to decline after the economy recovers. By 2013, total annual welfare spending will have grown still more, to nearly $1 trillion. Over the 10 year period from 2009 to 2018, federal and state welfare spending will total $10.3 trillion. This does not include Obamacare’s massive expansion of Medicaid, or the massive new entitlement providing subsidies for families making close to $100,000 per year, and beyond. Together, this abusive entitlement spending will add trillions more.
Even in 2005, government spending on these means tested welfare programs was 25% more than was spent on national defense, and that was at the height of the wars in the Middle East. Government overall, federal, state and local, spends more only on the big entitlements for retirees, Social Security and Medicare, and on education, and total welfare spending may have even shot beyond education by now. Indeed, over the past 2 decades, total welfare spending has been growing faster than Social Security and Medicare, about twice as fast as education, and nearly 3 times as fast as national defense.
Of course, the big picture comprises the entire scope of entitlement programs, including Social Security and Medicare. Social Security spending for 2010 was $721.5 billion, with Medicare spending totaling $457 billion for the year, for a combined total of $1.179 trillion. Adding in federal welfare spending for the year leaves a combined total for entitlement spending of $1.879 trillion. The total federal budget for that year was 3.720 trillion. So entitlement/welfare state spending overall for that year was just over 50% of the entire budget. Not exactly stingy.
The War on Poverty famously began in 1965. From 1965 to 2008, the total spent only on means tested welfare for the poor in 2008 dollars has been nearly $16 trillion, according to the Heritage Foundation. Rector reports that has been more than all spending on all military conflicts from the American Revolution to today, in 2008 dollars.
What have we gotten for all of that spending? Poverty fell sharply after the Depression, before the War on Poverty, declining from 32% in 1950 to 22.4% in 1959 to 12.1% in 1969, soon after the War on Poverty programs became effective. Progress against poverty as measured by the poverty rate then abruptly stopped.
Ryan’s budget only slows the growth of this welfare/entitlement empire. All of those commentators weeping, wailing and gnashing their teeth over Ryan’s budget are not living in the real world.
Peter Ferrara is director of policy for the Carleson Center for Public Policy, a senior fellow for the Heartland Institute, and director of entitlement and budget policy for the Institute for Policy Innovation. He served in the White House Office of Policy Development under President Reagan, where he worked directly for Robert Carleson. He is the author of America’s Ticking Bankruptcy Bomb: How the Looming Debt Crisis Threatens the American Dream and How to Turn the Tide Before It Is Too Late, forthcoming from HarperCollins, which discusses welfare reform in more detail.
Bond King Bill Gross: America Won't Defaultby R.M. Schneiderman
For all the talk of Republicans gutting entitlements and Democrats raising taxes on the rich to solve America’s long-term budget deficits, the head of the country’s largest bond fund says the gridlock in Washington will not ease over the next two years—and that a fiscal crisis may ensue before any real progress occurs. But a U.S. debt default, he says, will not be the end result.
In an interview Wednesday, Bill Gross, co-founder of the California-based Pacific Investment Management Company, or Pimco, said continued inaction on the budget deficit could lead to an erosion of wealth. “The negative repercussions would be a lower dollar, higher inflation, and artificially low interest rates,” he said. “All surreptitiously pick the pockets of investors.”
Earlier this week, Standard & Poor’s, one of the three main credit rating agencies, lowered its outlook on the United States to “negative,” triggering a wave of jitters among investors. In an effort to reassure them, Treasury Secretary Timothy Geithner and other White House officials said the nation’s credit rating would never fall below triple-A, the highest grade.
Yet Gross said S&P is only stating the obvious. The fiscal situation of the United States is “God-awful,” he said. “Washington talks a big game [but] then goes off doing what it always does—spending money.”
Gross, who has been in touch frequently with the White House and various government officials since the 2008 financial crisis, said he has a deep respect for the lawmakers who are trying to combat the nation’s debt problems. Yet at least in part because of the balance of power in Washington and the highly partisan climate, Gross is skeptical that anything constructive will happen before the situation becomes dire. Only a crisis, he said, is likely to break the impasse.
“The U.S. can’t and won’t default on its debt,” he said. “But if you buy U.S. Treasuries today you will be receiving a pittance relative to what you can get [buying] bonds in Canada or bonds in Germany.”
Tim Boyle, Bloomberg News / Getty Images
Whether Gross is correct remains to be seen. But the Pimco co-founder is certainly influential. His decision in March to sell all of his fund’s U.S. Treasury bonds generated considerable buzz on Wall Street, though the move, he said, was related to price, not credit, and investors ultimately did not react in fits and starts.
“The U.S. can’t and won’t default on its debt,” he said. “But if you buy U.S. Treasuries today you will be receiving a pittance relative to what you can get [buying] bonds in Canada or bonds in Germany.”
An eccentric, Gross reportedly has a penchant for wearing his Hermès ties unknotted and draped around his neck. Yet unlike Donald Trump, another wealthy eccentric, Gross said he is well past the age of political ambition. “I’m 67,” he said. “Although I do have better hair than Trump.”
In the end, Trump and other presidential hopefuls are unlikely to tip the balance in Washington, according to Gross. He said he believes Obama will “probably” win the 2012 presidential election, but that ultimately, the party that gains a legislative majority over the next two years will be the one to pass its vision of the future.
“If the public is swayed in the direction of reduced entitlements, then the Republicans will win the Senate,” he said. “If the public is swayed in the form of raising taxes on the rich, then the Democrats will win.”
Until then, however, the country’s fiscal reputation may continue to suffer.
R.M. Schneiderman is a reporter for Newsweek.
2008 crash deja vu: We’ll relive it, and soon
Commentary: New bubble is hotter, bigger than the last one
SAN LUIS OBISPO, Calif. (MarketWatch) — Warning, the stars are aligning, again. Much faster. We’re repeating the run-up to the 2008 meltdown, leading up to the next election.
Yes, another crash is coming, unavoidable, just like 2008. Not because our totally dysfunctional government is collapsing into anarchy, thanks to the 261,000 Super-Rich Lobbyists. Not just because our monetary system is run by the Bernanke Printing Press Company. And not just because a soulless conspiracy of Wall Street CEOs cares nothing for democracy and the public interest, only for their stockholders and their year-end bonuses.
IMF sees China topping U.S. in 2016
According to the latest IMF official forecasts, China's economy will surpass that of America in real terms in 2016 — just five years from now. Brett Arends looks at the implications for the U.S. dollar and the treasury market.
Another crash is coming soon because we’re back playing the same speculative games as we did for years prior to the 2008 crash. When we collapse, it will be because America’s leaders never learn the lessons of history. Never. In a BusinessWeek editorial, Peter Coy and Rouben Farzad described the bubbles:
“It’s as if 2008 never happened. Once again the worlds investors are pumping up bubbles that will probably explode in their faces. After the popping of a real estate bubble led to the first global recession since the 1930s, world markets are frothing like shaken Champagne. Pundits claim to have spotted price increases that are unsupported by economic fundamentals in assets ranging from U.S. farmland to Israeli biotech to Australian housing to Chinese cemetery sites. Commodities have soared. Global junk-bond issuance hit a record in the first three months of the year … this is the granddaddy of them all, an almost-encompassing bubble right at the heart of monetary systems.”
Yes, the “granddaddy of all bubbles” will explode right in Fed Chairman Ben Bernanke’s face, a bubble that will then sink like a stiletto deep into the “heart of the monetary systems” across the world, proving something Nassim Taleb said about Bernanke when Obama reappointed him in 2009, “he doesn’t even know he doesn’t understand how things work,” and that his methods make “homeopath and alternative healers look empirical and scientific.” Market Crash: Will it happen by Christmas?
Warning, same prediction also made 18 months before the 2008 crash
Now here’s the fascinating part of that prediction. Today’s new bubble-blowing resembles the four-year run-up to the 2008 crash, even replicates the pre-election timing. Why? First, because Jeremy Grantham, GMO chief, money managers of $100 billion, made virtually the same warning as the Coy-Farzad team 18 months before the 2008 meltdown.
Listen very closely and compare how what Grantham said in July 2007, 18 months before a clueless Henry Paulson and Ben Bernanke stood by and did nothing before the crash in the fall of 2008. Listen, the similarity is so eerie you’d think the two predictions were written by the same guys four years apart, though they weren’t.
Coincidence? Perhaps, but the real problem is that during the 18-month run-up from July 2007 to the 2008 crash, our leaders, Paulson and Bernanke, were misleading everyone: Paulson, “best economy seen in my professional life.” Bernanke, “the subprime loan crisis is contained.” And earlier Greenspan, a myopic Reaganomics-Ayn Rand clone who later recanted, said the problems were just some “regional froth.”
Now listen and compare Jeremy Grantham’s July 2007 prediction with BusinessWeek’s warning: “The First Truly Global Bubble: From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds to mundane blue chips; it’s bubble time. … Everyone, everywhere is reinforcing one another. … The bursting of the bubble will be across all countries and all assets … no similar global event has occurred before.” It came true 18 months later. Meanwhile Paulson and Bernanke kept publicly dismissing warnings they didn’t like.
Warning, America’s leaders will deny the next crash, won’t be prepared
Later in 2009 Grantham also began warning that we had “learned nothing” and were “condemning ourselves to another serious financial crisis in the not too-distant future.” Get it? America’s leaders in Washington, Wall Street and Corporate America are so predictably irrational, so doomed to repeat history, they cannot hear, see or comprehend the warnings of men like Grantham, who manages $100 billion, a guy who can’t afford to ignore the lessons of history. He’s also understands why humans deny warnings, why we inevitably make stupid mistakes over and over.
Yes, Grantham was already pointing out how we “learned nothing” from 2008, how we were destined to repeat the same, even bigger, mistakes. Pointing to a key chart, Grantham’s “favorite example of a last hurrah after the first leg of the 1929 crash,” he saw obvious similarities between 1929-30 and today, warning that we’re in for a long, long period of recovery, like the 1930s Great Depression: “After the sharp decline in the fall of 1929, the S&P 500 rallied 46% from its low in November to the rally high of April 12, 1930, then, of course, fell by over 80%.”
Then last year Grantham updated his warnings, drawing an analogy to the biblical warnings of Joseph: “The idea behind seven lean years is that it is unrealistic to expect to overcome the several problems facing most developed countries, including the U.S., in fewer than several years.” So here we are, closing in the elections of 2012, with 18 months to go. The countdown clock’s ticking louder, while Newt, Paul Ryan and The Donald are sucking the air out of the media cycle, making certain that once again we’ll miss the coming perfect storm in the financial markets … just as Paulson, Bernanke and so many others did in 2008.
Let's Put to Bed the 'America Is Bankrupt' MythBy John Tamny
To read economic and political commentary with any kind of frequency is to be bombarded daily - and hourly for that matter - with breathy articles about a United States groaning under deficits that surely signal bankruptcy, Social Security checks that eventually won't clear, and of course a looming financial crisis. A recent New York Times column by noted deficit scold David Stockman naturally referenced America's "desperate" financial situation.
Much of this commentary is well written, it's certainly popular, but it's also total nonsense.
To understand why we must first consider the marketplace for U.S. Treasuries, which is the deepest in the world. As sentient beings all, no doubt most of us can remember similarly scary commentary about the U.S.'s bankruptcy going back at least to the early ‘80s, but anyone who acted on all the scaremongering through short sales of U.S. debt was wiped out, and in a substantial way.
And that's the first problem with the bankrupt narrative; specifically that the deepest, most informed markets in the world disagree. If U.S. finances were really as bad as the commentariat suggest, and have been suggesting for decades, Treasuries would be in freefall.
Indeed, be it an individual, a company or a country, truly bankrupt entities can't borrow at low rates of interest. By virtue of being insolvent and unable to pay back debts, bankruptcy causes borrowing rates to rise, and in a very big way. That U.S. Treasury continues (sadly) to borrow large amounts of money, and that investors line up for the privilege to purchase the debt, tells us that those who regularly dine out on the bankruptcy concept should temper their rhetoric.
To understand why they should, it has to be remembered that large as the Treasury's debts are, basic economic models whereby the U.S. economy grows in the 3% range show that over time the debt could be paid off with ease. So if the debt is what concerns people, the simple answer is to unshackle the individuals (reduced tax rates and regulations, free trade, and a stable dollar) who comprise the U.S. economy, and in allowing the productive to produce, revenues necessary to pay off government debt that we worry too much about will be easily paid off.
About the above, it should be said that any tax plan, be it lower or higher rates (both can work) used to goose revenues, should be looked at with skepticism. Politicians irrespective of party always spend the revenues that reach them, so the better long-term plan is to cut tax rates so low that revenues actually decline, and do this in concert with spending decreases that bring the federal government within its constitutional limits. We don't have a revenue problem, we have a spending problem.
Of course some who buy into the bankruptcy argument, and there are many, also argue that a crisis awaits for the size of our national debt growing as a percentage of the U.S. economy. Their muse in this regard is a recent and very worthwhile book by economists Carmen Reinhart and Kenneth Rogoff, This Time Is Different, in which Reinhart and Rogoff note an historical correlation between country debt reaching 100% of GDP, and default.
The problem with using the above-mentioned history is that the United States is not just any country. Filled with arguably the greatest collection of minds and entrepreneurs in the world (the number would be even larger absent a silly American aversion to immigration), debt that forces other countries to default can't fell a country stocked with such amazing wealth producers.
Figure Japan's national debt is presently 220% of its GDP (92% in the U.S.), but there doesn't exist any market evidence of Japan being on the verge of default; Japan's problems a combination of protectionist policy in the U.S. that forced a massive deflation on the country, along with an aversion to failure that props up companies that should have been allowed to fail. This is in no way meant to excuse ridiculous levels of spending in both Japan and the U.S. (the spending itself weighs on economic growth), but it is to say that the history of defaults can be deceptive.
What's missed in all of this bombastic commentary about deficits, spending and bankruptcy is what's the crisis, and what's the cure. Rather than argue that the looming crisis for the U.S. is the day that investors tire of U.S. debt, the scaremongers in our midst should reorient their narrative.
Indeed, the true crisis at present is all the government spending which signifies capital waste and destruction, and what that tells us about the myriad Microsofts, Googles and Intels that never saw the light of day thanks to our federal government consuming so much limited capital. Similarly the crisis is an individual one when we consider the millions of Americans who might be doing things that are actually stimulative to the economy and to their self esteem were they not working for the government.
In short, the crisis is decidedly not the day when investors turn the other cheek to the issuance of government debt. Instead, the crisis we're experiencing is in the here and now as an ever expanding government and its gargantuan need for capital smothers true entrepreneurialism, and the productive jobs that entrepreneurs create.
America is not bankrupt, and it's not close to being that way. But rather than fear the "bankruptcy" day that never seems to come, it's time to change the discussion to the greater truth that the U.S. was a nation founded on limited government, and if we return to just that prosperity will be our reward, along with freedom from all the silly articles about America being broke.
Kass: False Sense of Security
In 2007 and early 2008, I warned that the impact of unregulated, unwieldy and unpriced derivatives plus a speculative blowoff in residential home prices around the world produced a toxic combination that would bring down stock markets and economies worldwide.
There were few of us (naysayers) with this view back then -- in fact, you could count them on two hands, with Bill Fleckenstein, Nouriel Roubini, Barry Ritholtz, Josh Rosner, John Mauldin, Dave Rosenberg, Meredith Whitney and Gary Shilling among the only disbelievers who sounded the foreboding scream of skepticism and economic warning.
I remember being one of those standard-bearers of pessimism in multiple business media platforms -- on "The Kudlow Report," when guest hosting "Squawk Box" and when interviewed by Alan Abelson in Barron's. At times, even to myself, I sounded like a didactic Cassandra -- after all, stocks were marching ever higher in an orderly fashion, crushing the shorts who stuck out like the proverbial sore thumb.
Back then, on Sir Larry Kudlow's "The Kudlow Report," I debated the uber bulls, Don Luskin, Dr. Bob, Brian Wesbury, Jim Paulsen and many others. Good people and hardworking analysts/economists who were no doubt nice to their mothers and certain in their views.
During that period leading up to the Great Decession of 2008-2009, my friend/buddy/pal, Larry Kudlow, taking a cue from wordsmith Peggy Noonan, coined a wonderfully crafted phrase, calling the U.S. economy "the greatest story never told."
To me, at that time, I saw a domestic economy that appeared healthy but with foundations that were cracking. At odds with Larry, I adopted the conflicting phrase "the greatest story ever sold."
Here is what I wrote on The Edge (my RealMoney Silver trading diary) in early-March 2008 column "The Greatest Story Ever Sold?" after an appearance on "The Kudlow Report":
Until late 2007, a long habit of not thinking that anything could go wrong in the stock market had given equities and the U.S. economy the superficial appearance that all was right. It seemed as if almost every market plunge was seen as a buying opportunity by investors. The dependability and pattern of an immediate market recovery that accompanied every market dip, however, similar to South Pacific's Bloody Mary's incessant happy talk, might be in the process of changing.Eventually, I and the others were proven correct; we were right for the right reasons, and we did well for our clients. Those most convicted, such as hedge-hogger John Paulson, made billions of dollars shorting the markets, but most money managers lost 40%-60% of their clients' money
This time might be different as a protracted period of nonsensical (and often nondocumented) credit/debt creation might have gone too far, as evidenced by the current waves of involuntary deleveraging of all sorts of overvalued assets.
For almost three years, The Edge has emphasized that an unprecedented collapse in housing prices would have a profound impact on credit and would expose the financial follies and leverage at the world's leading banks and brokerages. I previously wrote that investors will only learn who has been swimming naked when the (credit) tide goes out.
As Warren Buffett spelled out in Berkshire Hathaway's (BRK.A_)/(BRK.B_) 2007 Annual Report, "What we are witnessing at some of our largest financial institutions is an ugly sight." The economic dependency on the unregulated growth of derivatives and the threats accompanying the rapid expansion of credit and debt have raised the specter that an unknowable amount of risk now permeates the world's financial system, as the peeling of the credit onion has yielded uncommon discovery month after month. One week, the problem lies in subprime; then, it surfaces in leveraged loans; then, in adjustable rate preferreds; and, in the most recent week, problems have arisen in the traditionally safe municipal bond markets -- and so on and so forth.
I remain deeply skeptical that the domestic economy will continue to thrive given the complexity and extent of U.S. economic and credit issues. The Edge continues to argue that the cost of avoiding a recession might be greater than the cost of enduring a recession. Few have agreed, as calls for monetary shock and awe have been plentiful. Unfortunately, the unintended consequences of re-inflating the domestic economy is seen vividly in the rising price of oil ($100 per barrel), near $1,000 per ounce gold (14 record highs in 2008), spikes in the price of other hard and soft commodities and in an unending weakness in the U.S. dollar.
The latter concern, depreciation of our currency, remains the most disturbing result of undisciplined U.S. monetary and fiscal policy. Over this weekend, Buffett expressed his thoughts on the subject of the U.S. dollar in his annual letter to shareholders of Berkshire Hathaway: "Our $2 billion daily of force-fed dollars to the rest of the world may produce global indigestion of an unpleasant sort."
I see Fed policy of lowering interest rates as pushing on a string. Lower interest rates will not likely have the desired economic results:
- It won't make banks lend, even despite a more positively sloping yield curve.
- It won't make builders build, even despite the possibility of lower mortgage rates.
- It won't make consumers spend, as they are levered and spent-up.
- It won't make businesses expand, as confidence ebbs and corporate margins and profits suffer.
After dropping for four consecutive months, we would not be surprised if the markets regained their footing in the short term. While it is too early to be certain whether the current bear market is in the process of testing January's SocGen market bottom or is embarking on another leg down, I favor the former. Nevertheless, intermediate-term concerns are intensifying in their scope and depth. The following expected headwinds will likely result in a more difficult market backdrop over the next few years and could provide an extended period of substandard returns:
- We are at recession's doorstep. The ECRI's leading indicators signal unambiguously that the U.S. economy is at the doorstep of a recession; the series is at the lowest level since 1980.
- Credit conditions are getting worse. The credit markets have not strengthened against the backdrop of improving equities since the January 2008 low. In fact, although the yield curve has steepened, junk bond spreads and broker credit default swap spreads have worsened while the turmoil continues to move up the ladder of credit.
- The powers that be fail to address the housing depression and the adverse credit markets. Forty years ago on "Meet The Press," William Buckley, the founder of the modern conservative movement, had some comments that have applicability to America's leadership today (though he had a different idea of the party he was scorning.) when he said, "I would rather be governed by the first 2,000 names in the Boston telephone directory than by the two thousand people on the faculty of Harvard University." A timid and unimaginative Executive Branch and Treasury Department have failed to address the housing and credit industry's woes. Moreover, the Federal Reserve is behaving like Milton Friedman's "fool in the shower."
- Inflation no longer remains well-anchored. Energy and food prices remain stubbornly high and, according to recent government releases, are beginning to seep into core prices.
- Profit margins are eroding. Corporate profit margins, the most mean-regressing series in finance, have begun to recede in the face of decelerating sales growth and cost pressures.
- Economic decoupling is proving to be an illusion. Increasingly, non-U.S. economies are feeling our domestic weakness.
- The U.S. dollar is in a free fall. Our currency seems to drop to new lows on a daily basis, putting pressure on European economies (and elsewhere), which could, in time, raise the specter of trade protectionism.
- The hedge fund industry is beginning to contract. The dominant investor of the last decade (hedge funds) is contracting around the globe. Outflows and forced liquidations could prove challenging to the demand/supply equation for stocks and credit instruments -- especially considering the degree of leverage that has been employed.
- There are threats on the political spectrum. The continued strength of Senator Obama's candidacy raises the increased possibility of higher tax rates for individuals and corporations and, again, the threat of trade protectionism.
- Technical signs are eroding. While there are some emerging technical positives -- the 200 new lows on Friday are still well below the 1,100-plus new lows at January's SocGen market bottom, and put/call ratios, around 1.25, are now at the highest level since that time -- the market remains technically challenged.
"Time heals what reason cannot."As it is said, time heals everything, as today many of those circa 2007-2008 bulls have been reincarnated and, despite serious setbacks two to three years ago, have morphed back into astonishingly confident and prominent cheerleaders -- almost as if their major-league investment boner never even occurred.
The Bipartisan March to Fiscal Madness
By DAVID A. STOCKMAN
IT is obvious that the nation’s desperate fiscal condition requires higher taxes on the middle class, not just the richest 2 percent. Likewise, entitlement reform requires means-testing the giant Social Security and Medicare programs, not merely squeezing the far smaller safety net in areas like Medicaid and food stamps.
Unfortunately, in proposing tax increases only for the very rich, President Obama has denied the first of these fiscal truths, while Representative Paul D. Ryan, the chairman of the House Budget Committee, has contradicted the second by putting the entire burden of entitlement reform on the poor. The resulting squabble is not only deepening the fiscal stalemate, but also bringing us dangerously close to class war.
This lamentable prospect is deeply grounded in the policy-driven transformation of the economy during recent decades that has shifted income and wealth to the top of the economic ladder. While not the stated objective of policy, this reverse Robin Hood outcome cannot be gainsaid: the share of wealth held by the top 1 percent of households has risen to 35 percent from 21 percent since 1979, while their share of income has more than doubled to around 20 percent.
The culprit here was the combination of ultralow rates of interest at the Federal Reserve and ultralow rates of taxation on capital gains. The former destroyed the nation’s capital markets, fueling huge growth in household and business debt, serial asset bubbles and endless leveraged speculation in equities, commodities, currencies and other assets.
At the same time, the nearly untaxed windfall gains accrued to pure financial speculators, not the backyard inventors envisioned by the Republican-inspired capital-gains tax revolution of 1978. And they happened in an environment of essentially zero inflation, the opposite of the double-digit inflation that justified a lower tax rate on capital gains back then — but which is now simply an obsolete tax subsidy to the rich.
In attacking the Bush tax cuts for the top 2 percent of taxpayers, the president is only incidentally addressing the deficit. The larger purpose is to assure the vast bulk of Americans left behind that they will be spared higher taxes — even though entitlements make a tax increase unavoidable. Mr. Obama is thus playing the class-war card more aggressively than any Democrat since Franklin D. Roosevelt — surpassing Harry S. Truman or John F. Kennedy when they attacked big business or Lyndon B. Johnson or Jimmy Carter when they posed as champions of the little guy.
On the other side, Representative Ryan fails to recognize that we are not in an era of old-time enterprise capitalism in which the gospel of low tax rates and incentives to create wealth might have had relevance. A quasi-bankrupt nation saddled with rampant casino capitalism on Wall Street and a disemboweled, offshored economy on Main Street requires practical and equitable ways to pay its bills.
Ingratiating himself with the neo-cons, Mr. Ryan has put the $700 billion defense and security budget off limits; and caving to pusillanimous Republican politicians, he also exempts $17 trillion of Social Security and Medicare spending over the next decade. What is left, then, is $7 trillion in baseline spending for Medicaid and the social safety net — to which Mr. Ryan applies a meat cleaver, reducing outlays by $1.5 trillion, or 20 percent.
Trapped between the religion of low taxes and the reality of huge deficits, the Ryan plan appears to be an attack on the poor in order to coddle the rich. To the Democrats’ invitation to class war, the Republicans have seemingly sent an R.S.V.P.
Washington’s feckless drift into class war is based on the illusion that we have endless time to put our fiscal house in order. This has instilled a terrible budgetary habit whereby politicians continuously duck concrete but politically painful near-term savings in favor of gimmicks like freezes, caps and block grants that push purely paper cuts into the distant, foggy future. Mr. Ryan’s plan gets to a balanced budget in the fiscal afterlife (i.e., the 2030s); the White House’s tactic of accumulating small-fry deficit cuts over the enormous span of 12 years amounts to the same dodge.
Some of the best minds on Wall Street are obsessing about the theoretical chance that the country might default on its debt if Congress and the president somehow fail to reach an agreement and raise the so-called debt ceiling.
Now, there's plenty to worry about when it comes to the economy -- from rising gas prices and the threat of inflation to the ever-looming possibility that the anemic recovery might peter out.
Make no mistake, default would be terrible. It wouldn't just make us a basket case like Greece or Portugal; it would probably lead to a global financial collapse that would make the 2008 crisis seem trivial.
But no serious politician in either party is talking about letting the country default on its debt -- even if they don't reach an agreement on raising the debt ceiling by mid-May, when our borrowing will hit the current limit.
Yes, even if Republicans play hardball and refuse to let the country borrow more unless President Obama agrees to more budget cuts, things don't go boom. A combination of tax revenues on hand, savings from furloughing government workers and a few other measures would certainly allow the richest country in the world to meet its obligations.
So we ain't Greece just yet.
Yet much of Wall Street is treating imminent default as a serious threat to the country's, if not the world's, financial well being. In recent weeks, firms like megabank JPMorgan have been scrambling to issue reports predicting apocalypse unless Congress allows the country to borrow ourselves into oblivion.
Somehow, we're supposed to see unbridled spending as the responsible course. In fact, raising the debt cap to borrow new money to pay off old debt without making other cuts is exactly what led Greece, Portugal and maybe soon Spain and Italy into financial meltdown -- as it did to New York City in the 1970s.
Yet reports like the House of Morgan's ominously titled "The Domino Effect of a US Treasury Technical Default" are being taken seriously among financial analysts and in the financial media -- without a necessary discussion of the big banks' huge vested interest in the Washington status quo.
Start with the politics. Morgan boss Jamie Dimon is a committed Democrat. After haggling with the administration over financial reform, he's now back in the president's good graces and has even been invited back to the White House for a briefing. He's also a pal of Treasury Secretary Tim Geithner, who's leading Obama's efforts to get the debt ceiling raised without any of the spending cuts Republicans have demanded.
Oh, and Morgan's former chief lobbyist, Bill Daley, is now Obama's chief of staff.
Over at Goldman Sachs, CEO Lloyd Blankfein and President Gary Cohn are also well known progressives and past supporters of the president -- and Goldman's economists may even surpass Morgan's in their advocacy of Obamanomics.
Just recently, Goldman economists told us that if Republicans forced the president to accept a mere $61 billion in budget cuts, the country might slip back into recession.
As one long-time Wall Street economist recently told me, "Goldman is the worst," but every major firm's economic department now overtly "supports government spending stimulus and Fed pump-priming" as the path to economic nirvana.
Which gets us closer to the real conflict: The free money the Federal Reserve has printed and the massive government spending under Obama have been very, very good to Wall Street.
The Fed's policy of printing money and keeping interest rates at rock bottom give the banks access to borrow cheaply to support their operations, even if they don't lend that cash to Main Street. And Wall Street firms are making real money underwriting bonds, thanks to the stimulus, not to mention the various "green" spending programs that are at the heart of Obamanomics.
Notice that Wall Street is telling us much more about the dangers of not raising the debt ceiling than it is about how two-plus years of super-low interest rates are finally starting to fuel inflation, as seen in the recent spike in commodity prices.
Wall Street surely will give us more doomsday talk as the debt-ceiling debate rages on, but consider the source. After all, some of these same guys not long ago were making huge bets that housing prices would keep rising forever.
Charles Gasparino is a Fox Business Network senior correspondent and the author of "Bought and Paid For."
Give Me Life, Liberty and a Tank of Cheap Gas: Caroline Baum
When President Barack Obama took his deficit-reduction show on the road last week, he found audiences had more on their minds than spending cuts and tax increases.
“What are you doing about gas prices?” someone at a town- hall-style meeting at North Virginia Community College in Annandale wanted to know.
The reaction of town-hall attendees to soaring gas prices, which hit a nation-wide average of $3.84 last week, probably isn’t much different than that of ordinary Americans, who are devoting a bigger chunk of the household budget to filling the tank.
What exactly do folks have in mind when they ask the president what he’s doing about oil prices, which are set by the market? Do they want him to respond with, “Drill baby drill”?
I doubt it. Environmentalists haven’t warmed up to oil exploration and drilling since last year’s Deepwater Horizon explosion in the Gulf of Mexico.
Maybe the public wants more hydraulic fracturing to extract the vast supplies of natural gas from the Marcellus Shale formation in the Appalachian Basin, which would reduce demand for oil-based products? Not in my backyard, thank you.
Or, was the question about gas prices a sign of support for the administration’s clean energy initiatives? Not unless windmills can power autos.
I’ve got it! Along with life, liberty and the pursuit of happiness, Americans want a guarantee of cheap gas prices. All that stuff about us wanting less government in our lives, the take-away from the 2010 mid-term election, is just a bunch of hooey.
With his approval rating heading in the opposite direction of gas prices, Obama devoted his Saturday radio address to the issue. After accusing politicians of being disingenuous when they create the appearance of doing something about high gas prices, the president leveled with us:
“There’s no silver bullet that can bring down gas prices right away,” he said.
Just two days earlier, he had announced the formation of a task force to root out “cases of fraud and manipulation in the oil markets” -- a favorite presidential tactic that creates the appearance of doing something about high gas prices.
If the current situation adheres to the standard script, the Senate will invite executives of Big Oil to testify about Big Profits at a time when ordinary Americans are hurting.
None of it is likely to alleviate high gas prices, which aren’t the root of the problem anyway. Americans have a fundamental philosophical dilemma over what we want from our government. In good times, we want an arms-length relationship. In bad times, we want a nanny looking out for us. We can’t have it both ways. This mind-set needs to change.
Last week, after Standard & Poor’s lowered its outlook to negative for America’s AAA long-term sovereign credit rating, I asked Nikola Swann, the primary credit analyst on the report, about recent parallels. He told me that, in the mid-1990s, both S&P and Moody’s downgraded Canada’s credit rating (from AAA to AA+ and Aa2, respectively), as a result of the country’s deteriorating fiscal situation, the lack of a plan to deal with it and a reliance on external borrowing.
Canada’s deficit as a share of gross domestic product had, in the early ‘90s, ballooned to 9.1 percent, and public debt had risen to 68.4 percent of GDP. By comparison, the U.S.’s publicly held debt is expected to reach 72 percent of GDP this year, according to the White House Office of Management and Budget.
Canada worked hard to regain its AAA status in 2002.
“Canadians felt embarrassed by the downgrade, which helped build grassroots support for fiscal discipline,” Swann said.
The groundswell of public support to do whatever it would take to get Canada’s fiscal house in order started with the ouster of the ruling Progressive Conservative Party and the installation of the Liberal Party. Prime Minister Jean Chretien and Finance Minister Paul Martin slashed federal spending by 20 percent. Provincial and local governments came to see balancing the budget as a virtue. By 1998, Canada went from chronic budget deficits to a surplus.
I’ve heard a lot of emotions expressed about the U.S. fiscal stalemate, but embarrassment isn’t one of them.
Instead, opinion polls consistently show that Americans don’t want cuts in their Medicare and Social Security benefits. They don’t want to pay higher taxes. The one thing most Americans favor is raising taxes on the rich.
The trouble is, there aren’t enough rich folks to provide for our unlimited wants. Once people accept this, then the government can proceed with a deficit-reduction plan. If we can’t send a message to Washington that we are willing to accept sacrifices, then we’re the ones who should be embarrassed.
Cutting Expenditure Is A Good ThingBy Jeffrey Miron
The crucial question facing the United States is whether the current path of federal expenditure is vital to our economic well-being. If so, then the U.S. faces a grim economic future. This path implies an exploding national debt, and the taxation necessary to tame the debt would cripple economic growth. The U.S. would thus appear to have no good policy choices.
The right view of all the expenditure is different, however; the U.S. can slash it with minimal adverse effects. Many cuts, in fact, improve economic performance and thus make sense independent of the fiscal outlook. Here are some key examples.
Agricultural subsidies encourage farmers to grow fewer crops, hiking food costs for everyone. Cancelling this expenditure saves $15-$20 billion per year.
Federal transportation spending is rife with misguided projects like the Big Dig in Boston or high-speed rail in Florida. These handouts to construction companies and unions cost far more than plausible estimate of their benefit, so elimination improves the budget and frees resources for more productive uses. Cut $30 billion from federal transportation spending, at least.
The foreign aid budget is also ripe for cuts. The humanitarian component has noble goals but rarely benefits the intended recipients, ending up in the coffers of corrupt middlemen or government officials. The military component is mainly welfare for third-world dictators, like former Egyptian president Hosni Mubarak. Cutting $20-$30 billion is a no-brainer.
Drug prohibition is terrible deal for taxpayers: it does little to reduce drug addiction while fostering crime, corruption, and insurrection abroad. Legalization would save the federal government some $15-20 billion annually, plus allow taxation of legalized drugs.
Countless other programs - individually small, but significant in the aggregate - are irrelevant to our economic well-being. Funding for the National Endowments for the Arts and Humanities, and the Corporation for Public Broadcasting, is tiny compared to private support. So the arts, humanities, and "Sesame Street" would all thrive without government money. Pork barrel projects and earmarks - e.g., the Sparta, NC Teapot Museum - lack even a remotely sensible justification. Cancelling pork could save tens of billions.
Thus cost-benefit skepticism suggests cutting expenditure substantially - easily $200 billion per year- no matter what the state of the budget. And entitlement spending provides an even greater opportunity for productivity-enhancing cuts.
Social Security attempts to rescue elderly households from poverty, a goal shared by most Americans. But Social Security goes well beyond this compassion by subsidizing middle-class retirement for a large fraction of recipients. Thus millions who are still productive choose retirement because of a taxpayer subsidy.
Policymakers can reduce this distortion by phasing in a higher retirement age, consistent with the increase in life expectancy from 63, when Congress created Social Security, to more than 78 now. Those elderly unable to work would be eligible for Disability Insurance. Expenditure would decline by hundreds of billion dollars per year under full implementation.
Medicare, like Social Security, is both excessive and harmful. The generous subsidies mean that consumers do not pay the full costs of their health care, so they consume too much. The result is inflated prices and distorted incentives, including unnecessary testing, surgery, and medication.
As with Social Security, policy can reduce these distortions by phasing in a higher age of eligibility. Further, policy can improve the balancing of costs and benefits by expanding co-pays and deductibles. Most beneficiaries can handle these increased costs, while the poorest elderly would receive Medicaid. These changes can save hundreds of billions pear year, all while generating a more efficient health care sector.
The defense budget is a further source of beneficial expenditure cuts. Misguided weapons systems and unwanted military bases around the word divert significant resources from private uses. And conducting three wars with no apparent benefit to our national security just inflames hostility against the United States. The savings from a better targeted national defense could approach $300 billion year.
Cutting $1 trillion from annual federal spending is therefore not just possible; it is crucial because this expenditure harms the economy. And expenditure cuts generate a productivity bonus: they permit lower tax rates, which improve the economic incentives for work, savings, and investment.
The U.S. faces a fiscal meltdown because government undertakes activities that are not necessary or useful functions of government. The only way to end our fiscal pain is for government to get out of these activities. The good news is that so doing will pay a double-dividend: improved economic performance, and end to our fiscal nightmare.
Jeffrey Miron is Senior Lecturer and Director of Undergraduate Studies at Harvard University and Senior Fellow at the Cato Institute. Miron is the author of Libertarianism, from A to Z.
Updated Cato Budget Plan
Chris Edwards has released an updated version of his Plan to Cut Spending and Balance the Federal Budget. The plan proposes spending cuts of more than $1 trillion annually by 2021, which would balance the budget without resorting to damaging tax increases. Federal spending would be reduced to 18 percent of gross domestic product by 2021 under the plan, which compares to President Obama's projected spending that year of 24.2 percent of GDP.
Some key points:
- No sacred cows are spared. Defense, domestic, and so-called entitlement programs are all cut.
- The plan recognizes that the scope of federal activities must be curtailed. It would begin the reversal of decades of federal expansion into hundreds of areas that should be left to state and local governments, businesses, charities, and individuals.
- Instead of viewing federal spending cuts as a necessary evil, the plan recognizes that the cuts would shift resources from often mismanaged and damaging government programs to the more productive private sector, thus increasing overall GDP.
- The plan doesn’t achieve budget balance by increasing taxes. Under current tax policy, federal revenues as a share of GDP will gradually return to levels considered normal in recent decades. It is federal spending that has reached abnormally high levels. It must be reduced in order to get the government’s spiraling debt under control.