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Economy

Competing Visions: Why The Super Committee Failed

As Bruce points out below, the failure of the Super Committee should come as no surprise to anyone who was paying attention. Even where committees arrive at an agreed solution, it rarely ever gets implemented. What’s worse, in this case, the Super Committee was operating under the sword of automatic spending cuts to domestic and military programs should it fail to arrive at a consensus — i.e. no side had any incentive to deliver more or less than what would automatically go into place anyway. Of course, Pres. Obama running a re-election campaign based on a “do nothing” Congress certainly didn’t inspire his Democratic brethren on the Super Committee to find common ground either.

But these aren’t the real reasons for the Super Committee failure. Instead, as Jeb Hensarling (R-TX) writes in the Wall Street Journal today, the underlying problem is one of ideological impasse:

Ultimately, the committee did not succeed because we could not bridge the gap between two dramatically competing visions of the role government should play in a free society, the proper purpose and design of the social safety net, and the fundamentals of job creation and economic growth.

For the members of the Super Committee, the choice seemed to be between raising taxes on a small percentage of earners and making no cuts or reforms to the shibboleths of Medicare and Social Security, or reducing taxes and modestly curbing entitlements at some point in the future. In other words, it was a choice between expanding or slightly retarding the growth of government. However, it’s not just the specifics that make compromise difficult, if not impossible. Where one side believes that government is always the answer to what ails us, and the other (at least nominally) operates from the premise that individual effort leads to greater prosperity for all, there is only so much compromise that can be reached between the two. Eventually, government will be either too small or too big for the other side to bear.

This is the crucible in which somehow a compromise was to be reached on federal spending.

As it stands now, government spending is equal to about 35% to 40% of GDP, while our national debt is around 100% of GDP. At the federal level, we are borrowing 40 cents of every dollar that we spend, and entertaining trillion dollar plus deficits year after year for as long as we can reasonably forecast. This is the vision of those who see government as playing the primary role in most every aspect of society since it costs a lot of money to execute that vision. Yet, despite the fact that government has done nothing but grow over the past sixty years, they are convinced that anything smaller than what we currently have will lead to economic and social ruin. To be sure, after finally getting the government foot in the door of universal health care, the liberal base is not about to countenance any willing walk-back on those gains. The Democrats on the Super Committee were well aware of this, and that accepting changes to Medicare and Social Security or any other dearly loved social program would result in a deep backlash from those who believe that all of life is dependent on government.

Opposing that vision are those who think that government should be smaller and less intrusive, especially with respect to our economy. They look at our ever-growing debt and anemic, if not illusory, economic gains and see nothing but trouble down the road we’re traveling. Unfortunately, while total government spending is often publicly recognized as the problem, too many of these visionaries think that simply reducing tax rates will flood the federal coffers and all will be right with world. It’s true that raising taxes in a declining or struggling economy will tend to exacerbate, not alleviate, the problem. But Republicans on the committee also know that their base stand ready to punish any member who suggests raising taxes, now or in the future, regardless of the fact that the spending cuts necessary to get our debt problems under control simply aren’t feasible. And they won’t have much better luck at the ballot box if they even hint at reforming Medicare or Social Security.

Even where they are willing to take that chance, however, the Democrats can’t politically afford to compromise:

The Medicare reforms would make no changes for those in or near retirement. Beginning in 2022, beneficiaries would be guaranteed a choice of Medicare-approved private health coverage options and guaranteed a premium-support payment to help pay for the plan they choose.

Democrats rejected this approach but assured us on numerous occasions they would offer a “structural” or “architectural” Medicare reform plan of their own. While I do not question their good faith effort to do so, they never did.

Republicans on the committee also offered to negotiate a plan based on the bipartisan “Protect Medicare Act” authored by Alice Rivlin, one of President Bill Clinton’s budget directors, and Pete Domenici, a former Republican senator from New Mexico. Rivlin-Domenici offered financial support to seniors to purchase quality, affordable health coverage in Medicare-approved plans. These seniors would be able to choose from a list of Medicare-guaranteed coverage options, similar to the House budget’s approach—except that Rivlin-Domenici would continue to include a traditional Medicare fee-for-service plan among the options.

This approach was also rejected by committee Democrats.

The Congressional Budget Office, the Medicare trustees, and the Government Accountability Office have each repeatedly said that our health-care entitlements are unsustainable. Committee Democrats offered modest adjustments to these programs, but they were far from sufficient to meet the challenge. And even their modest changes were made contingent upon a minimum of $1 trillion in higher taxes—a move sure to stifle job creation during the worst economy in recent memory.

Even if Republicans agreed to every tax increase desired by the president, our national debt would continue to grow uncontrollably. Controlling spending is therefore a crucial challenge. The other is economic growth and job creation, which would produce the necessary revenue to fund our priorities.

Meanwhile, we operate under a tax system that is so heavily skewed towards the highest income producers that our government is dependent on about five percent of the taxpayers for a majority of its revenue, and only a quarter of all tax payers for more than 85% of that revenue. To the Democrats, this is apparently a good start. Republicans, on the other hand, see an unfair system that, if properly reworked, could raise even more revenue. Either way the spending, and thus the government, grows.

The definition of “priorities” is the real sticking point. It means either that everything from price and income support to cradle-to-grave health care is a priority, or that only the basic structural necessities of national defense, courts of law and last-resort safety nets qualify. There has been a great deal of compromise on that definition over the past several decades (albeit, always resulting in an expanding government), but it seems that we’ve finally reached the limit where any further acquiescence by one side results in unbearable loss to the other side. It’s difficult to see how we can successfully move forward as a unified country with such diametrically opposed visions for the role of government. Indeed, maybe we can’t for very much longer.

"…we’re about to face a situation that will destroy our cultural and economic underpinnings…”

For those of you who have not taken the opportunity to listen to this week’s podcast, the above was part of the summation of our situation by Dale Franks. I’d recommend you listen to the whole thing.

No one knows in detail what will happen in the next few years. The number of variables is too high. But the general outline is clear. In the near term, the US and about half a dozen European countries have unsustainable debt curves. That unsustainable debt is going to cause financial catastrophe not in a decade or two, but sometime in the next few years.

Given the interconnected nature of the world’s trade and financial system, that catastrophe is likely to spread rapidly. Even countries whose sins have been modest, such as Germany, will be caught up. Countries who depend on the US and Europe for the money to drive their economies, such as China and India, will be caught up. It’s going to be very, very messy, and a lot of people are going to suffer.

The participants in the podcast all agreed that there isn’t any obvious politically feasible way to reverse course. I agree, and I have a few comments to add.

I see the following as the biggest three groups involved in the political decision making, from largest to smallest, with some overlap among them:

(1.) The "rationally ignorant"* – those who don’t pay that much attention to politics, and have at best a vague understanding that we have a problem. These people, to the extent they think about it at all, believe that shuffling some things around a bit, electing some different people, and passing a few laws will fix whatever is ailing us.

They believe in such a “solution” because that’s the way things have gone their whole lives. Somehow the ruling class has always managed to pull a rabbit out of the hat and keep things humming. They won’t believe this process will fail until it does. 

There are even quite a few Republicans in this category. They can generally be identified by their fixation on finding "the next Reagan".**

(2.) The ones who have some glimmering that there’s a problem, perhaps because they are unemployed, mired in debt, or both, but have a convenient scapegoat in mind. That’s usually "the rich" and "the evil corporations", though for Republicans, it might be Obama, Barney Frank, George Soros, or whoever. Like group 1, they believe it’s easy to fix the problems – just come down on the scapegoat, and everything will work out.

(3.) The "ruling class" as defined by Codevilla. This group is mostly convinced of their own magnificence, and thus believe if the right people are in charge (which usually includes them personally), then they can solve any problems. The ones in this group with enough situational awareness to realize the magnitude of the problem also realize that it’s pointless to do anything significant to try and solve it because that would get them cashiered from the ruling class. So their efforts are in mitigation, obfuscations, and generally stretching things out until they are retired from the game.  

Given this breakdown, we can talk all we want about who the GOP is going to nominate for president, but it really doesn’t matter. We have too big a cohort of people in this country who either believe we don’t really have a serious problem, or think there is a serious problem, but believe the cause is a boogieman of some kind that must be vanquished.

There’s a good reason they believe that. They are kept in the dark by a mainstream legacy press desperate to cover up the failings of the left-leaning governing style preferred by the vast majority of journalists.

In fact, none of the ruling class – which includes the politicians, journalists, academicians, lobbyists, staffers, and the like – has any motivation to tell the harsh truth about the trouble we are in. As I said above, they have a strong disincentive to do so. If they did, the other members of the ruling class would turn on them. They would likely lose their livelihood.

We’re also fighting ingrained culture. We have two generations that have been raised to believe that, ultimately, someone else is responsible for the essentials of their lives. They believe they are supposed to retire in their fifties or early sixties, with a pension followed by Social Security. They believe they are supposed to relinquish concern for healthcare costs when they turn 65. They believe that if things get bad enough in their lives, unemployment, and later welfare, will keep a roof over their head and food on the table. They’ve been trained to believe this by a ruling class that has been assuring them since the 1930s that they have the fundamental right to a soft life.

These people do not want to think about a world where these things are not true. It would be exquisitely painful to worry about those things. So they don’t. They ignore the warnings of the "radicals" who trot out the debt curves and the demographic stats. It’s easy enough to do that – the supposedly smart reporters ignore them too, if they don’t come right out and ridicule them. The abysmally ignorant social scientist cohort produces yet another round of "analysis" purporting to prove everything is OK, or at least would be if those rich people would just give up some more money. The political class assures them that it will be all right if they just keep electing the right people.

This state of affairs has no exit except catastrophe so major and undeniable that it affects most people personally. By then, it is virtually certain that the world financial system is past the point of no return in its current form.

I’ve stopped trying to talk to people around me about what is happening and likely to happen. I would have to spend hours removing the false assumptions they hold before I could even start. Plus, as I mentioned, they don’t want to believe what I need to tell them. It’s just too painful.

We are about to see a crisis that will set back living standards in this country to a level many alive today have never seen. The only reason it probably won’t get down to subsistence level is the technology base that we have. But we’re probably going to see stagnation, crumbling infrastructure, high unemployment, inability for most people to build any significant assets, and possible civil violence if the problem becomes so severe that it starts affecting the food supply (which I hope won’t happen).

I have no idea, and I don’t think anyone else does either, about how we will get through the chaos and what things look on the other side of it. I see three major categories of possible outcomes, and there may be more. But that’s a subject for another post.

(*)When I used the term "rational ignorance" in a comment at Daily Pundit about five years back, Bill Quick picked it up and had some unkind things to say about such people. (Daily Pundit is undergoing a platform change, so I can’t link to the page. It was on June 10, 2006, and I’ll link to it once the site over there is back to normal.) I understand Bill’s take, but unlike him and some other opinionists on the right, I don’t use it pejoratively. I use it the way economists originally intended: simply to mean people who are unwilling to invest the time and cost to become informed about the real underlying state of our political world.

It is expensive to become so informed, and the payoff for any individual is small. The aggregate effects, as we are seeing, may be horrendous. That doesn’t change the underlying economics. A political system that relies on individuals to invest the time to become informed about complex political issues, out of a higher understanding of their civic duty, is as doomed to failure as a system that expects individuals to commit to "from each according to his ability, to each according to his needs". In both cases, such an expectation crashes up against the behavior of real people, i.e., human nature. For me, this is one of the cornerstones of my strong belief in highly limited government – it’s the only form that allows people to not know much about the political world because that world is pretty simple. We just have not figured out how to make limited government stable in the long term in the face of rational ignorance plus plus the cohort of moochers that’s present in every society.

(**)While I grant that Reagan was better than many alternatives, including the pathetic scold he replaced, at best he gave us some breathing space to solve the underlying problems of a decaying welfare state. He didn’t really make much progress in actually solving the long term problem, and his inability to get Democrats to cut spending led to some significant contributions to our debt problems.

Economic Statistics for 18 Nov 11

Today’s economic statistical releases, or rather release, since there’s only one, the Index of leading indicators.  Which actually looks pretty good this month, up 0.9%. There’s only one negative element for the month: vendor deliveries are showing slightly fewer delays, which pretty minor. The report indicates that the risk of a downturn or recession is receding. That’s good news.

Or, would be, if Italy, Spain, Ireland, and Portugal weren’t ready to go belly up in default, destroy the Euro, trash global banking, and plunge the world into a Second Great Depression.

But, you take the good with the bad, right?

~
Dale Franks
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GM bailout costs even more than previously reported

And there is more.   Shikha Dalmia details it at Reason:

The Treasury Department yesterday revised its loss estimate for the Government Motors bailout from $14.33 billion to $23.6 billion, thanks to the company’s sinking stock price. GM’s Sept. 30 closing price, on which the new estimate is based, was $20.18, about $13 less than its December IPO price and $35 less than what is needed for taxpayers to break even.

The $23.6 billion represents a 25 percent loss on the feds $60 billion direct “investment” in GM. But that’s not all that taxpayers are on the hook for. As I explained previously, Uncle Sam’s special GM bankruptcy package allowed the company to write off $45 billion in previous losses going forward. This could work out to as much as $15 billion in tax savings that GM wouldn’t have had had it gone through a normal bankruptcy. Why? Because after bankruptcy, the tax liabilities of companies increase since they have no more losses to write off.

This means that the total hit to taxpayers, who still own about a quarter of the company, could add up to $38.6 billion. That’s even more that the $34 billion on the outside I had predicted in May.

You’ll remember we were vociferously against the bailout, saying the company should proceed through normal bankruptcy despite the absurd nonsense being spread about the effect of bankruptcy on jobs and the like.  Had that been done, a much more stable and lean GM would have emerged.  And taxpayers, meaning government, wouldn’t still own 25% of the company – in fact the government wouldn’t own any of it.  Nor would unions.

The effect of government intrusion has been to worsen the company’s outlook.  Again Dalmia explains the reason that the political priorities of the Obama administration will lead the company into even more troubled financial waters:

Although GM will never, ever make taxpayers whole, taxpayer losses could be mitigated if GM’s stock price rises before the Treasury sells its remaining equity, something it was supposed to do by year-end but has postponed under the circumstances. But right now at least the prospects of a serious upward move in GM’s stock don’t look too good for reasons at least partly beyond GM’s control.

GM actually has been doing quite well in North America and China with profit margins of 10 percent, among the best in the industry. How long that will last is an open question. That’s because GM’s new competitors are not Toyota and Honda that share its cost structure but Hyndai and Kia that have a far leaner one. These companies concentrate on the small car market and don’t offer a full product line so GM and Ford’s most profitable vehicles—those evil, gas-guzzling, greenhouse-gas emitting SUV’s and pickup trucks—are somewhat insulated from the downward price pressure. But the greens and Obama administration want GM to reorient its product mix away from big cars and toward money-losing hybrids and electrics, something that could well put GM back in a hole.

But that’s part of the administration’s long-term strategy for ruining GM. The company’s big weak spot right now is Europe for two reasons: One, thanks to political pressure and labor resistance, it hasn’t been able to address its bloated cost structure there. Two, Europe’s economy is imploding, weakening car sales.

That’s right, government is steering the company in which it owns 25% of the stock, to orient in a direction that is bad business, but as far as the administration is concerned, good politics.  

There’s a reason central planning always fails.  It’s because it ignores market demand.   Central planning’s core belief is it can anticipate accurately the public’s demand and produce products it will buy.   See the Chevy Volt.  Then see the Chevy Tahoe. 

As Dalmia points out, the market for small cars is very competitive.   But the sector that GM has an advantage in is politically unpopular with the party the administration represents (note again the party ideology running the agenda and not what is good for the company or the country).  So the government attempts to focus the company in a direction away from its most profitable business and toward the politically acceptable but unprofitable small car sector.

Another in a long line of lessons on how central planning always fails.  This particular example also points out that when ideology is left to dictate the direction of a business instead of the market the likelihood of failure goes up exponentially.

And when the strategy fails it will not be a “market failure”.  It will again be government doing its usual lousy job of picking winners and losers.  We, of course, end up being the ultimate losers when it makes its picks.

~McQ

Twitter: @McQandO

Economic Statistics for 17 Nov 11

Today’s economic statistical releases:

Initial jobless claims continue to improve slowly, dropping 2,000 this week to 388,000.

Housing starts stayed fairly steady, though off a bit at a 628,000 annual rate. Housing starts, however, jumped to 653,000, a positive sign for future construction.

The Bloomberg Consumer Comfort Index for the week improved to -50 from the last week’s -51.6.

The Philadelphia Fed Survey shows growth slowed in the Atlantic region, falling from 8.7 to 3.6.

E-Commerce sales rose 1.9%, following the 2nd quarter’s increase of 2.6%.

~
Dale Franks
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Economic Statistics for 16 Nov 11

Today’s economic statistical releases:

Like the PPI yesterday, the CPI softened last month, down -0.1%, and up 3.6% year over year. The core rate rose 0.1% last month and 2.1% last year.

The Mortgage Banker’s Association reports that mortgage application dropped sharply in the latest week, down -12.2%.

Industrial production was up sharply, rising 0.7% last month, while capacity utilization rate rose to 77.8% in the nation’s factories.

The Housing Market Index rose to 20, the 3rd consecutive 3-point jump, and the highest reading in 18 months.

~
Dale Franks
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Economic Statistics for 15 Nov 11

Today’s economic statistical releases:

A decline in energy prices resulted in a -0.3% drop in producer prices, with the core rate, which excludes food and energy, remaining unchanged last month. On a year-over-year basis, producer prices have risen 6.1%, with the core rate rising 2.8%.

Retail sales activity continued to increase in October, rising 0.5% overall, and 0.3% excluding auto sales.

The Empire State Manufacturing Survey edged back into positive territory for the first time since May, rising from -8.48 to 0.61. The six-month outlook is strengthening, with predictions of growth in new orders, which should, if it materializes, result in increased hiring as well.

Finally, in the two weekly retail sales reports, Redbook reports pre-Thanksgiving promotions helped boost store sales by 3.3%. ICSC-Goldman says sales rose 0.3% last week, up 3.21% from the year before.

~
Dale Franks
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Obama: Lazy America

Where has this man been?  Or perhaps the most salient question is what planet has he been hiding on?  This is what he said in Hawaii to a gathering of CEOs at APEC about why we’re apparently in the mess we’re in:

“We’ve been a little bit lazy over the last couple of decades. We’ve kind of taken for granted — ‘Well, people would want to come here’ — and we aren’t out there hungry, selling America and trying to attract new businesses into America.”

Yes friends, the blame-shifter-in-chief says it is we lazy Americans who’ve taken everything for granted these last few decades that are responsible for the economic downturn we are experiencing now.

Never mind the fact that this administration has openly warred on business.  Never mind we have the highest corporate taxes in the world.  Never mind that government intrusion and regulation have only gotten worse.   Never mind that government has actively sought to block businesses which could make a world of difference in both jobs and competitiveness.  For instance:

— blocking oil and gas exploration in the Gulf even after safety and spill prevention procedures were upgraded

— trying to keep one of our major manufacturers, Boeing, from opening a new plant (jobs) in one of our few major industries (aerospace) by attempting to block non-union labor from working in a right-to-work state.

— delaying the Keystone XL pipe line (again, thousands of high paying jobs) for political reasons (delayed until after the election).

Etc.   Not to mention the government policy and enforcement of that policy (Community Reinvestment Act) that led to the housing bubble and financial melt down.

It isn’t about a lazy America.  It’s about an over-reaching, intrusive government whose level of intrusion and market distortion have only gotten worse “over the last couple of decades”. 

And here’s a clue Mr. Obama – we lazy Americans didn’t run up a $14 trillion dollar debt.  You pandering politicians did.  And that debt load is also killing our competitiveness and has led to a downgrade of the country’s credit rating — on your watch.

Yeah, blame it on others, Mr. Obama  — but thinking Americans,  Americans who’ve actually run something and done something, know the score.  Hopefully they’ll put you in a new position in November of 2012, where your primary responsibility will be getting with your wife and picking out wallpaper for your presidential library.

Lazy. 

Where on earth has he been?

~McQ

Twitter: @McQandO

It has come to this–China mocks West’s political system and economics

And, at the moment, rightfully so.  That’s not to say theirs is a superior system by any stretch.  Theirs just happens to be thriving at this moment in history.  But that doesn’t change the correctness of the basic kernel of their assessment:

In extensive talks with a series of Chinese leaders, an oft-cited point of criticism is the gridlock and “dysfunction” they see in Washington. They say fawning by U.S. political leaders seeking re-election has created an “entitlement culture” where the public has grown dependent on government largesse. Now, with the United States facing monumental economic and debt problems, the political system has been unable to curb generous entitlement programs or counter the economic downturn.

I really hate to say “I told you so”, because a) as Megan McArdle said yesterday it is “so … bleeding … obvious” and b) it really doesn’t take a rocket scientist to figure this was going to happen.  No, not China mocking us – they have their own economic problems ahead of them so I’m not particularly impressed with their mocking attitude.  The idea that running huge deficits, encouraging an entitlement culture, redistributing wealth and running up unpaid future welfare obligations was sustainable.

Heck, people like me and other authors on this blog have been saying that for years – decades even – that it was just a matter of time before it all collapsed like a wet paper box.  And we always get the hand wave from the so-called enlightened that we just don’t know what we’re talking about.

To them I say, “welcome to reality”.   Like gravity, the laws of economics will finally assert themselves.

And they have.

However, the performance of the Chinese economy in the global recession has had a beneficial effect for them among other nations.

China is now at a pinnacle of global leadership and influence as a result of its emergence as an economic superpower, even as the U.S. and other major industrial powers fell into disrepair as a result of the 2008 financial crisis, said Guo Zhenyuan, an analyst at the institute.

China gained the admiration of developing nations around the world with its ability to weather the crisis emanating from the U.S., even emerging from the downturn as the world’s main engine of growth, while its superior economic performance provoked jealousy in the U.S. and other developed nations, he said.

With that said, here’s what they’re now selling:

Mr. Chan said U.S. political leaders are so focused on short-term gains that they fail to make the painful long-term choices and changes in social programs needed to ensure the solvency of the government and vitality of the economy.

Chinese leaders, by contrast, lay out plans for the long term and systematically achieve them, producing unprecedented gains in living standards and a remarkable two decades of uninterrupted growth at nearly double-digit annual rates.

This proves that the Chinese system is better than the democratic system that the U.S. promotes around the world, Mr. Chan said.

And the dictators and totalitarians around the world take heart.  

Only because Western leaders, decades ago, perverted the true meaning of Western democracy and did exactly what the critique above says – began trading goodies for votes and created the social welfare state which was destined for failure.

Whether or not you agree that democracy is the problem is a rather moot point.  That’s what China is pitching and apparently there are eager listeners.  And we all know there are those out there who think they too can implement the Chinese model.    As Dr. Kissinger said they call it, “Socialism with Chinese characteristics”.   The rest of us call it totalitarianism, but like I said, in the face of the epic failure of Western Social Democracy and the rise of China, it’s a tough argument to fight at the moment.

~McQ

Twitter: @McQandO