Archive for June, 2011

November 2012

June 30, 2011

The November 2012 elections are set to be the most important since November 1980 when American voters turned the tide against progressive socialism for the first time in the post-WWII era. November 2012 in fact will be Armageddon or the End of Days – the Great Battle for the economic future of this nation.

In a fundamental sense, the battle is already framed in terms of the federal debt ceiling debate that is now sputtering into public prominence. For, make no mistake about it, the federal debt crisis will be resolved. The world’s bond markets will see to that. And they do not operate under Congressional or White House rules. The growth in the nation’s debt as a per cent of gross domestic product will be reined in either by massive spending cuts, by massive tax hikes, or by some combination of the two.

Tax hikes or spending cuts – that is the question! The electorate surely will decide, even if by rational ignorance default- voting.

If Obama and the Democrats are returned to office, spending will stabilize at around 25 per cent of gross domestic product, with taxes rising to the same percentage. And the United States will stagnate like Old Europe, its youth massively under-employed, with riots on the Mall contained by water hoses and tear gas, just like in Athens at this time or in Richard Nixon’s America.

If a reformist GOP candidate is voted into the White House, with a Tea Party-constrained GOP majority in Congress, federal taxes and federal spending will meet sometime in 2016 at 20 per cent of gross domestic product. And the constitutional republic will be saved as a free-enterprise capitalist island in an ocean of social market progressivism, much as was the case after 1980. 

A democracy secures the government that it truly deserves. So go to it Americans and make your choice. And take the full responsibility for your actions. In so doing, share a passing thought for those of your children and your grandchildren who cannot vote at this time, but whose future you are surely determining.

How dumb is ex-Governor Rod Blagojevich?

June 29, 2011

‘You could cut off his head and he wouldn’t be any dumber’ (Chicago insider)

“At his first trial, Blago’s lawyers keep him off the stand and he gets a hung jury, except for one count.  The defense decides to put Blago on the stand for the second trial.  Common in the movies, this is rare in real life.  It usually happens for one of two reasons: the defense fears the prosecution has proved its case beyond a reasonable doubt, or the defendant insists on it, sure that his charm will win over jurors in the same way it won over voters.  So Blago takes the oath and tells the jury of his insecurities, a middle-class kid going to Northwestern University where he  ‘was afraid that I wouldn’t measure up to the other kids.’  But, he had one thing going for him.’Those were the days when your hairbrush was an extension of your hand,’ he said.  The jury had already listened to tapes in which Blago threatens to withhold $8 million in state funding from the state’s largest children’s hospital, serving mostly the children of the poor, unless he gets a $50,000 campaign contribution.  and now he is telling the jury about his hairbrush?” Roger Simon, ‘Another Illinois Governor Goes to Jail’, The Wall Street Journal, June 29, 2011

Let us accept the general thrust of the evidence and confirm that Blago is as thick as a 4″ x 4″ plank of wood. Let us further assume that this is evident to any person who has to size him up for any position of responsibility. And on this basis let us attempt to answer some uncomfortable questions that the mainstream media never confronts about the nature of democracy in the United States.

1. Given that the State of Illinois empowers its Governor to replace any of its U.S. senators who resign in mid-term – Barack Obama in this instance – which is safer for mankind, a Blago free-choice or a Blago auction?  Commonsense dictates that the auction must be the better way to go. At least the winning candidate must demonstrate superior access to wealth – in the case of Illinois such access may be voluntary or machine- coerced, who knows – unless Blago is so dumb that he sells out to the lowest bidder.

2. If Blago is so obviously dumb, what does this say about the grey cells of the Illinois electorate. If they are as dumb as Blago – definitionally they cannot undercut him in terms of brain-power – should they be allowed in the ballot box at all? What kind of democracy emerges when thick planks control the outcome?

3.  If selling an election is a felony, what about buying one? President Barack Obama is currently targeting $1 billion in campaign funds in order to purchase the 2012 presidential election. Should that put ‘Yes we can’ into a jail cell adjacent to Blago?  If democratic elections basically are bought and sold in return for cash outlays is that precisely what the Founding fathers had in mind?  Certainly it makes for a social contract solution.  But not necessarily one designed to protect our  lives, liberties, and the pursuit of happiness!

4.  If feel good politics is what the game is all about, then should we not all be chanting  ‘Go, Blago, Go’ as he runs for the presidency in November 2012?  With all that hair, no other candidate would stand a chance. He may not even have to dye it!  And Americans love good hair,do they not? Indeed that is the only memorable  JFK-legacy!

The Financial Times shows its (red) colors

June 28, 2011

“In the ‘yes we can’ days after Barack Obama’s election in 2008, the all-star team of economists gathered round the new president seemed one reason for optimism…On taking office Mr. Obama made Harvard’s Larry Summers head of the National Economic Council and Christina Romer, a leading economic historian, head of the Council of Economic Advisers.  Other first-rate advisers included Austan Goolsbie, a young star from the University of Chicago, and Paul Volcker, elder statesman of unsurpassed eminence….Now though, Mr. Obama has no choice but to take a more prominent role in economic policy.  He will do so with a weaker team.  Mr Summers has gone back to Harvard, Ms. Romer to the University of California, Berkeley, Mr. Goolsbee is returning to Chicago.  Mr. Volcker’s role, always vague, appears defunct.  Mr Obama is not bereft of good economic advice and has competent people at hand, but the intellectual firepower is reduced.” Editorial, ‘Barack Obama’s economists’, Financial Times, June 28, 2011

The Financial Times simply does not understand what happened, most probably because the Editor of the newspaper shares President Obama’s progressive socialist ideology.

President Obama did not choose his first economic team because of its academic distinction but because it shared his own predilections for progressive socialism and for the destruction of laisser-faire capitalism.  In truth, none of the three above-mentioned economists is so distinguished.

Larry Summers has had a checkered academic career as he has glided in and out of government positions over many years. Almost all his scholarly papers are co-authored. As an economist of great initial promise, he has significantly under-performed. However, Larry Summers is a committed advocate for progressive socialism including the massive redistribution of income and wealth through highly progressive taxation.

Christina Romer’s reputation is almost completely dependent on co-authoring scholarly papers with her truly distinguished husband, David Romer. She was completely outclassed intellectually by Summers and did not possess the stature to confront him and stand him down. So she played the role of White House nonentity until she fled the President’s team barely 18 months into his presidency.

Austan Goolsbee is a long-time sycophant to President Obama, writing  policy papers for him  throughout his time in Illinois. His resume is truly thin. He would not have made tenure at any middle-ranked economics department in the United States. One supposes that the University had other reasons for retaining his services, just at it had other reasons for retaining a grossly under-performing, non-publishing  Barack Obama on its law school  faculty for a period of ten years.

The glue that held that economic team temporarily together was progressive socialism, not high quality economics. As progressive socialist economic policies failed to lift the economy out of its recession, so the team disintegrated, hopefully before the full blame would fall upon their shoulders.

Of the original team, only Paul Volcker wore the right-sized shoes.  But a Fed Chairman who had  squeezed stagflation out of the United States by the wise use of monetary constraint, under the presidential leadership of Ronald Reagan, was never going to influence a president whose dream was to emulate Lyndon Johnson’s Great Society Program. So Paul Volcker was sidelined from the outset, though certainly not over-awed by Larry Summers.

The advantages that President Obama now possesses are twofold. First, he has learned first-hand that progressive socialism does not work, indeed that its continued pursuit will terminate his presidency in 2012. Secondly, he has a Republican House majority that will not allow him to force bad policy into law. That is why his economic policy will improve during the second-half of his first term.  The supposed reputations of his economic advisers are not relevant to this change of direction; not relevant at all.

Why did Willie Sutton rob banks?

June 27, 2011

Because that was where the money was!

When searching for fraud in government spending programs, public choice reminds us to keep Willie Sutton firmly in mind. Look for where the loot is located and you will find the fraudsters.

Which brings me to Medicare and Medicaid, two of the nation’s largest sources of potential loot.  More specifically, focus attention on the intersection between the two programs and, voila mes amis, we need look no further. The intersection between Medicare and Medicaid is a Willie Sutton paradise!

This intersection comprises the people who receive both Medicare – the program for those 65 and older or disabled – and Medicaid – the program for the poor – 9.7 million ‘dual eligibles’ as they are called. The statistics for this group are stark and revealing.  They comprise 16 per cent of Medicare enrollees, but 27 per cent of the program’s total spending.  They comprise 15 per cent of Medicaid’s enrollees, but 39 per cent of the program’s total spending.  To put the Willie Sutton opportunity into perspective understand that in 2009, total Medicare spending was $502 billion, total Medicaid spending was $374 billion for a grand total of $876 billion; of which the dual eligibles received $300 billion.

Chronic diseases and an exceptionally heavy use of nursing homes in this older population account for much of its outsize cost.  But this is far from the whole story.  A close examination of how the bills are divided up between the two programs for these joint users tells us a great deal how the fraudsters operate across the intersection, lifting their loot while exacerbating waste and mismanagement across  this  poorly supervised interface.

The two programs are separately funded. The federal government foots the entire bill for Medicare but splits the funding with the states for Medicaid, picking up on average 57 per cent of the total bill itself.  The programs were never designed to work together, and provide tempting opportunities for thieves and fraudsters to thrive along their tangled borders.

The first sign that something might be amiss is the differential characteristics  of Medicare dual eligibles and Medicare  only eligibles. Let me count the ways:

Cognitive or mental impairment: dual eligibles 55 per cent; sole eligibles 6 per cent.

In fair or poor health: dual eligibles 54 per cent; sole eligibles 24 per cent.

Nonelderly disabled: dual eligibles 41 per cent; sole eligibles 11 per cent.

Long-term care resident: dual eligibles 15 per cent; sole eligibles 2 per cent.

So we now understand that dual eligibles are an unhealthy segment of the elderly population, characterized by high rates of diabetes, cardiovascular disease, Alzheimer’s and depression.  Three in five dual eligibles have multiple ailments and more than two in five are mentally impaired.  What a feasting ground for the Willie Sutton’s of this world!

It turns out, unsurprisingly, that the dual eligibles are exceptionally heavy users of health care services.  Again, let me count the ways:

One or more visits per annum to the E.R.:  dual eligibles 44 per cent; sole eligibles 26 per cent.

One or more in-patient stays per annum: dual eligibles 29 per cent; sole eligibles 19 per cent.

One or more home-health visits per annum: dual eligibles 13 per cent; sole eligibles 7 per cent.

Average annual Medicare spending: dual eligibles $14,000; sole eligibles $6,000.

So evidently dual eligibles are where the money is.

To illustrate how the fraudsters operate let us focus attention on nursing homes.  When a Medicare patient transfers from a hospital to a nursing home, Medicare reimburses the nursing home at an average rate of $422 a day for 100 days. After that, if the patient is a dual eligible, the nursing home is paid by Medicaid at an average rate of only $172 a day.  The nursing home now has a clear incentive to return the patient to hospital for spurious tests and care. Once the patient returns to the nursing home, the Medicare payments again kick in for another 100 days. No wonder that many dual eligibles are in regular transit between hospitals and nursing homes!  Hospitals, nursing homes and states all benefit from shuffling patients in and out of hospital at 100 day intervals.

So if the Department of Health and Social Security truly desires to beat the bushes for program fraud, that is the intersection where it should focus its best weapons. Do not hold your breath, however, that such will be the case.  For where the Willie Suttons of this world thrive, so the interest groups that live well off their loot also thrive.  Dirty dollar bills wash there way through the U.S. Congress, the White House and the state capitols to make sure that the dual eligibles market grows without limit and that taxpayers continue to be ripped off by the unscrupulous Willie Suttons who prey on public resources dedicated, in principle, to the support of those who are mentally, physically  and materially impoverished.

Source: Janet Adamy, ‘Overlapping Health Plans Are Double Trouble for Taxpayers’, The Wall Street Journal, June 27, 2011

Combined NATO forces fail to take out Colonel Gaddafi

June 26, 2011

President Obama, under the spell of his three witches – Hillary Clinton, Susan Rice and Samantha Power –   took the United States into an illegal war against Colonel Gaddafi in Libya. Lacking any marshall spirit, the President hid his actions behind a supposed NATO hammer. It is now apparent that the hammer is broken and that NATO is losing the war against an isolated Colonel.  How have the might fallen on the field of battle!

NATO’s springtime expeditionary force has lost all momentum in the desert sand. As the campaign enters into its fourth month, the coalition is already fraying, not least in the United States, where the President had his knuckles firmly rapped for unconstitutional behavior this week by the House of Representatives. Libya is simply not big enough for impeachment proceeding to begin. But his three witches may find themselves strung up for sorcery in the not too far distant future.

NATO has clearly shown that it cannot punch its way out of a paper bag.  It has flown more than 4,700 strike sorties, pummeled bunkers , depots and vehicles, some belonging to the Colonel, many belonging to its supposed allies, including significant numbers of civilians. That is what happens when low-calibre pilots cannot hit their targets, and when drones are misdirected by incompetent handlers.

 Just imagine how little time it would have taken General George Patton to deal with Libya,  given a few tanks and  sufficient gasoline! General Patton would not have exceeded his time schedule. Nor would he have moaned and whined about bad luck and difficult terrain.

So incompetent are NATO forces in hitting their targets that they have become allies of Colonel Gaddafi. Libyans now realize that the Colonel at least is competent and likely is more sane than those who have instigated the NATO intervention.  ‘Allah protect Colonel Gaddafi’,  they now chant, as NATO missiles take out their schools and hospitals, their colleagues and their families.

Well done President Obama!  You sure know how to back losers in all aspects of your administration.

The legacy of FDR: two interpretations

June 25, 2011

“Partly through his own doing, partly through the dice roll of circumstances, Franklin Roosevelt radically altered the landscape of American expectations.  The small-government world of the nineteenth and early twentieth centuries was banished forever.  Americans demanded more of their government: more services, more safeguards, more security.  They got them – along with more taxes, more red tape, more intrusiveness.  At times some Americans would wonder whether the cost was worth the benefit.  But the skeptics were never convinced enough or numerous enough to turn back the clock and unravel Roosevelt’s handiwork.  He gave Americans what most of them agreed the country required during the emergency of the depression, and they sufficiently liked what they got that they retained it after prosperity returned.  ” H.W. Brands, Traitor To His Class: The Privileged Life and Radical Presidency of Franklin Delano Roosevelt, p.821

or

“Despite the existence of a financial panic, Franklin Delano Roosevelt was elected into office by Americans who retained a remarkable independence of spirit and  willingness to make their own way in life that had been the great legacy of the Founders and of all those freedom-seeking immigrants who had abandoned all they had to seek opportunity in the New World. By his actions while in extended office, FDR transformed a minor Panic into a Great Depression, and sowed the seeds of a  progressive socialism that slowly would throttle all enterprise out of  the capitalist system. By his pandering to the fears of the weakest remnants, and by his specious use of words of insincere comfort to those who had no desire to flourish as free individuals, FDR weakened the constitution of the People, made  the People excessively dependent upon governmment, and sowed the seeds for a  redistributive, rather than an entrepreneurial society. FDR was not only a traitor to his class. He was a singularly ill-informed and vacuous traitor to his nation.” Charles K. Rowley, June 25, 2011

Of loose money, money illusion, and stagflation

June 24, 2011

“The Federal Reserve is ending its second round of quantitative easing this month, and Chairman Ben Bernanke was asked recently if he thought the $600 billion in bond purchases had worked. Yes, he replied, because the stock market had risen sharply in value.  Then this week Mr. Bernanke was asked why the economy was lagging. ‘We don’t have a precise read on why this slower pace of growth is persisting,’ he said, in a rare and revealing case of modesty.’ Review and Outlook, ‘Of Wealth and Incomes’, The Wall Street Journal, June 24, 2011

A prescient reporter should have asked Mr. Bernanke a follow-up question, why the United States stock market is now in a process of correction, eliminating all the gains achieved earlier in 2011.  No doubt the complacent Mr. Bernanke would have pulled out another fraudulent ace concealed under his sleeve.  Whether or not his answer would have persuaded a gullible reporter is really beside the point.

Because in truth, Ben Bernanke now holds a poker hand consisting of the Ace of Spades, the Ace of Clubs, the Eight of Spades, the Eight of Clubs, and the Queen of Diamonds. Yes, that self-same Dead-Man’s-Hand held by Wild Bill Hickock when gunned down playing five-card poker in Deadwood, North Dakota.

The problem with Ben Bernanke’s poker strategy is that loose money cannot be focused like a laser beam on specific economic targets.  The Federal Reserve surely can create new dollar bills. But it cannot dictate where those dollar bills will end up in a global economy that still runs mostly on a dollar standard:

“with QE2 piling on near-zero rates, dollars flooded into assets other than stocks.  In particular, they flowed into emerging markets like China and Brazil and into commodities nearly across the board…One result has been a sharp increase in food and energy prices that took gasoline up to $4 a gallon.  These have produced…income effects, or a change in consumption resulting from a change in real income.  People who pay $4 for gasoline or $30 more for groceries, have less money to spend on other goods.  They also tend to feel poorer, which can influence their overall confidence in the economy.” ibid.

 The wealth effects unquivocally have helped the affluent and the financially savvy.  The income effects are felt most acutely by the middle class and the poor. The artificially low interest rates have helped the bankers and hedge funders. They have harmed the less-affluent elderly who rely disproportionately. on fixed interest returns on their limited asset portfolios.  So Ben Bernanke has abused his responsibility to maintain sound money in order to behave as a reverse Robin Hood – stealing from the poor to give to the rich. In so doing, his behavior conforms to a long line of Liberal -Democrat, Limousine -Progressives across the United States.

Loose money can create an illusion of economic recovery. Rational expectations quickly kick in, and the sun shines on the trickery, exposing the magician to the scorn of the multitude. Sadly, however, the loose money itself ultimately ends up in inflation, stagnating unemployment and retarded economic growth. That condition is known as Stagflation. We know stagflation well. We thought that Paul Volcker had conquered it during the Reagan administration.  Unfortunately, a singularly stupid or malevolent Chairman of the Federal Reserve has let the genie out of the bottle once again.

May God damn you, Ben Bernanke, for the harm that you have done!

How not to measure a company’s financial success

June 23, 2011

In recent years, American business schools – Harvard is an excellent example – are inundated with politically correct  professorial non-entities intent on socializing business enterprise from within. They and their brain-washed students act as fifth-columnists in the long march against free enterprise capitalism. So let me say at the outset that this column is hostile to that cause.

The only stakeholder in corporate enterprise is the shareholder. The CEO and the Board of Directors of any corporate enterprise has a single fiduciary issue: to maximize the return to shareholder equity while adhering to the rule of law. This sounds a simple enough goal – but in reality it is more complex that it first meets the eye. Once again, I turn to John Kay, former director of the Oxford University Business School, now writing for the Financial Times, to identify the deep waters that run beneath the calm surface of this concept.

“Would a chief executive whose principal goal was to increase the wealth of his stockholders fulfil that objective by achieving the highest possible return on equity?  Well, would you rather have a 20 per cent return on $1,000 or  a 25 per cent return on $500?  Ideally, you would like to find a company that would offer a 25 per cent yield on any capital you invested in it, but such opportunities do not exist.  If you could not do that, you would like to have both the 20 per cent and the 25 per cent projects, but you will often have to choose between alternative routes to the same objective, or different financial models for the same business.  So should you always choose the higher return on equity?  The answer is not obvious.  If you can expect to earn at least a 15 per cent return on your other investments, then you will be better off taking the 25 per cent proposition.  If you cannot – and you probably cannot – then the lower but still exhilarating 20 per cent return on the larger amount is a better choice.” John Kay, ‘How not to measure a business – by its rate of return’, Financial Times, June 22, 2011

For any given equity outlay, the larger absolute return, in dollars, not in rates of return, is the one to go for. So, if we assume that the opportunity cost of an investment is 7 per cent, then investing $1,000 at 20 per cent yields $200 a year, and investing $500 at 25 per cent yields only $160 a year. I can assure you Dear Readers that unless you are a personal  wealth-hater, $200 in the pocket is always better than $160.

So the rate of return metric is unsuitable for measuring business performance. Indeed it is a dangerous metric.  Worse still, it was a key factor behind the financial crisis of September 2008. How can this be? Imbibe the wisdom of John Kay in order to unravel the false logic  pumped out of America’s business schools:

Profits come from three sources: they represent a return on the shareholders’ contribution to the physical capital employed in the business, they represent a return on the risk inherent in the business, and they include the stockholders’ share of the revenues the company derives from its brands, its intellectual property, its systems, its resources and its market power.  For many modern businesses tangible assets are simply not important…One way of improving return on equity is to increase profits. But other methods are equally effective, and often easier.  Raising the level of risk will increase expected earnings.  Shrinking the equity base increases the return on capital.  Neither of these latter actions adds anything to the expected wealth of shareholders. But they may add a lot to the wealth of managers, if that wealth is linked directly or indirectly to return on capital employed or earnings per share.” John Kay, ibid.

Now you will see where john Kay is headed, at least within my definition of fiduciary duty. Management has no stake in a business enterprise. Management are simply hired hands. So any CEO and/or Board of Directors – themselves simply hired hands –  that treat management as a stakeholder and that rip off  shareholders to do so violate their fiduciary duty. That is precisely what  happened within  America’s leading financial institutions throughout the period 2002- 2008, that culminated in the  financial crisis of September 2008.

“There are many lessons from that episode, but one is that you should never judge a business – or anything – by a single metric.  especially not the wrong one.” John Kay, ibid.

‘The Times They Are A-Changin’ across the People’s Republic

June 22, 2011

News headlines today demonstrate that  ‘the Times they are a- changin’ across the People’s Republic of China.  The changes come in triples and they are seriously important:

1.  A late Chinese spring  is a-wakenin': On July 1, 2011, the Chinese Communist Party will be 90 years old.  Signs are that the Party may not make it to its century.  Grass-roots democracy is taking root in soil that was once exclusively autocratic:

“Indications are emerging that dissenting voices are gaining traction in the public square.  For instance, ordinary Chinese are running for election in local legislative bodies that are usually rubber-stamp bodies filled with reliable worthies chosen by the Party. the candidates are gaining such a large following that detaining them risks causing a wider societal backlash.:

and

“While hot money continues to flow into China in anticipation that the yuan will rise in value, the rich in China are moving some of their money out.  A recent survey by Bain consulting and China Merchants Bank found that investment abroad has doubled annually since 2008.  And 27% of individuals with more than $15 million in assets had already acquired a foreign passport, while another 47% were considering obtaining one.”

Editorial, ‘The Chinese Awakening’, The Wall Street Journal, June 21, 2011

2.  Wage-rates, they are a- risin': Starting in the early 1990s, the U.S. inflation rate began to decline, despite loose monetary policies, as low-wage workers in China joined the global economy and flooded the U.S. with cheap commodities. This epoch now appears to be over.  Prices of  goods imported from China are rising and are now a source of inflationary pressure across the United States. U.S. import prices, excluding oil have increased 8 per cent over the past two years.  This is a historic shift from their downward drift over two prior decades. This directional shift reflects the growing ability of Chinese workers to secure higher wages and the growing willingness of Chinese households to increase domestic consumption, in both cases resisting status quo pressures from the Communist Party.

Jon Hisenrath, Laurie Burkitt and Elizabeth Holmes, ‘Change in China Hits U.S. Purse’, The Wall Street Journal, June 21, 2011

3.  Foreign reserves they are a-relocatin':

“Standard Chartered compared China’s inflow of new foreign exchangfe reserves to net purchases of US government debt by buyers in China, Hong Kong and London.  These purchases fell dramatically in the first four months of this year to $46bn – equivalent to just 24 per cent of the $196bn in foreign exchange that China accumulated over the same period.”

Jamil Anderlini and Tracy Alloway, ‘Trades reveal China shift from dollar’, Financial Times, June 21, 2011

Thought for the day:

“Come senators, congressmen

Please heed the call

Don’t stand in the doorway

Don’t block up the hall

For he that get’s hurt

Will be he who has stalled

There’s a battle outside

And it is ragin’

It’ll soon shake your windows

And rattle your walls

For the times, they are a changin’.

Bob Dylan Lyrics, The Times They Are A-Changin’

Michael Boskin also learns some common sense

June 21, 2011

Michael Boskin disgraced himself as chairman of the Council of Economic Advisers under President George W. Bush by providing cover for that president’s foray into Keynesian economic policies. Indeed, Michael Boskin paved the hydraulic Keynesian path for Larry Summers by his support for such big -spending programs as the Medicare drug program and by his support for Alan Greenspan’s loose monetary policies. Throughout his term at the CEA, it would be difficult to detect any anti-deficit sensitivity in the utterances of Michael Boskin.

So it is something of a surprise and something of a joy to find a born-again Michael Boskin writing good common-sense about the U.S. federal deficit crisis in the columns of  The Wall Street Journal:

“Events are rarely kind to those who keep kicking the can down the road, expanding spending and exploding the national debt.  Payment ultimately comes from higher taxes, eroding the debt through inflation, or outright default and debt restructuring.  The cost of any of these actions will be severe.  Just ask taxpayers in Greece or Portugal facing a decade of depressed living standards.  Or the Japanese, whose stagnation is measured in decades, not quarters or years.” Michael J. Boskin, ‘Five Lessons for Deficit Busters’, The Wall Street Journal, June 20, 2011

It is always worthwhile to reflect carefully on the words of reformed profligates, not least because thrift does not course freely through their veins and arteries.  They have to control their own appetites before communicating their newly-found ant-statist philosophy to others. So I shall share with you the five key planks in Michael Boskin’s revisionist policy platform on the issue of the national debt.

Plank 1:  Cut spending and do not raise taxes. Michael Boskin, albeit belatedly, has read the 2010 NBER  study of post-WWII fiscal consolidations in developed countries  co-authored by Alberto Alesina and Silvia Ardagna.  That study concludes that successful deficit reduction programs average between $5 to $6 in spending cuts for every $1 in tax hikes.  Higher tax hikes almost always end up in recession.  If this lesson is learned, the Obama-Conrad proposal to balance spending cuts with large tax hikes should be dead in the water.

Plank 2: Control spending with enforceable procedures. Attempts by President Reagan and by Gramm-Rudman-Hollings to negotiate large spending cuts in return for modest tax hikes never materialized because the spending cuts were not enforced. Rent-seeking members of Congress revised and stretched out the original targets, presenting presidents with omnibus budget bills that were never vetoed. Michael Boskin does not explain from a public choice perspective, how such rational breaches can be avoided. But there is a way.  A balanced budget-tax limitation  amendment to the United States Constitution with felony-based  jail terms for any president or member of Congress who  voted to breach it, would pave a sure-fire way to success. For that reason, of course, would be profligates would fight such an amendment tooth and claw.

3.  Plank 3: Beware of baselines and budget gimmicks. Politicians are slimy reptiles (my interpretation, not Boskin’s).  They will scam whenever they can scam. And budget baselines are invaluable for scamming a rationally ignorant electorate.  Projected budget savings are usually measured against a baseline that incorporates dramatic spending increases and significant tax hikes.  So the current CBO baseline, for example, incorporates Stimulus I-III together with the expiration of the Bush tax cuts. This would enable President Obama to hail actual spending increases and actual tax hikes as spending cuts and tax reductions.  A shifting baseline is a politician’s magic elixir. Auto-pilot budgeting should be disallowed in order to allow the sun to shine on every nook and cranny of the budgetary process.

Plank 4:  Beware unintended consequences. Surprises tend to compound over time, escalating minor mistakes into major problems. As Boskin points out, the indexing of Social Security benefits to wages rather than to prices went all but unnoticed in the 1970s. Now, with the baby boomers retiring in large numbers, it has created trillions of dollars in unfunded Social Security liabilities. Similarly, recent Democratic and Republican administrations have removed a majority of Americans from the reach of the income tax.  This poses a serious threat to long-term budget dynamics (and I would add a long-term public choice threat to limited government). No representation without income taxation is a sound, if controversial, remedy for this structural problem.

Plank 5: Tackle fundamentals. If spending is projected to grow exponentially, meddling at the edges is dangerously deceptive.  By proposing an unenforceable time-constrained freeze on one-sixth of the budget, against a bloated baseline, President Obama is fueling the flames of the budget-furnace. What is required instead are cuts that compound and cumulate over time and that impact on the major entitlement programs, Social Security, Medicare (and I would add Medicaid).  Without such compounded changes, wily politicians are simply attempting to reap a large harvest of votes from an unwary electorate that does not recognize the long-term damage that is being imposed.  In this respect – my words not Boskin’s – Presidents George W. Bush and Barack Obama behave like the Okies of the 1920s, eroding the good soil on which their futures largely depend, thereby leaving their successors with the dust bowl and the grapes of wrath.

 

 

 


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