Sunday, June 24, 2012

Who Said It?

Cafe Hayek

Guess who said the following:

It just so happens that the green religion is now taking over from the Christian religion.  I don't think people have noticed that, but it's got all the sort of terms that religions use …  The greens use guilt.  That just shows how religious greens are.  You can't win people round by saying they are guilty for putting (carbon dioxide) in the air.

Answer here.

(HT David Rose)

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Sunday, June 17, 2012

RealClearMarkets - Obamanomics in One Lesson

Obamanomics in One Lesson

President Obama's statement that "the private sector is doing fine" is not just gaffe. It is a lesson in bad economics and an explanation of the failure of Obamanomics.

The specific premise behind that statement is that the cause of persistent unemployment is not the weakness of the private sector but rather a decrease in employment by state and local governments.

The Heritage Foundation provides the graph that refutes this on a purely factual level. It shows employment levels in the private sector versus state, local, and federal government since the beginning of the recession. Private-sector employment crashed by 7.6% during the depth of the recession and has only crept back up slowly. It is now about 4% below its pre-recession level, which means that it's still not quite halfway to a full recovery. That's not exactly "doing fine."

State and local employment, by contrast, continued to rise during the first year or so of the recession and only began to creep down in later years, declining 1.3% and 2.8% respectively, still much better than the private sector. And then there is the federal government, where hiring shot up during the first three years of the recession. You've got to have a lot of extra bureaucrats to cut all of those bailout checks and to figure out what's in Obamacare after Congress passes it. So even after a slight recent decline, federal employment is still up 11.6% since the beginning of the recession. So yes, the public sector is doing just fine.

These figures are all in percentages. Look at it in terms of absolute numbers, as this graph does, and the picture becomes even clearer. There are about ten times as many state and local employees as there are federal employees, so the big increase in federal hiring during the recession does not entirely compensate for the small drop-off on the state and local level. But there are five times as many private-sector employees as there are public-sector employees, so the weakness in private hiring is far more significant than the minor decline in public employment. Public-sector jobs are down by a couple of hundred thousand. Private-sector employment is down by four and a half million.

So how do Obama's apologists back up their claims? First, they don't mention the surge in federal hiring, as if that isn't part of the "public sector." Second, they simply cut off the beginning part of the graph and show only the changes in employment since the beginning of the recovery, not since the beginning of the recession. So what you see in their version is private-sector employment marching slowly but steadily upward while state and local employment slide slowly downward. It's easy to change the story if you just leave out the first half, the part where private-sector employees got laid off by the millions while public employees all kept their jobs.

Show the whole story, as in the two graphs I linked to above, and it is visually obvious what is really happening: public employment was flat or rising during the entire downturn, with only a minor downward slide in the last year or two--compared to a deep crash for the private economy, followed by a weak, inadequate, unfinished recovery. It is clear that the real story here is the private economy's failure to rebound.

Yet the fiction created by Obama's advocates is worth examining, because its assumptions are revealing.

Paul Krugman declared, "By this point in Obama's presidency, if we had normal public sector job growth, we would have around 800,000 more people. Firefighters, schoolteachers, police officers. Instead, we've got 600,000 fewer. So right there, it's like 1.4 million jobs that we should have had in the public sector."

Notice the new standard created here. Krugman's baseline is "normal public sector job growth" at pre-recession rates. This is what allows him to take a job decrease that he counts as 600,000 (again, not counting federal employment) and inflate it to 1.4 million, by counting 800,000 non-created phantom jobs as "lost."

Note that he does not apply the same standard to the private sector. He makes no attempt to project how much more private employment would have been created if we had continued to enjoy "normal private sector job growth." It is only the public sector that is entitled to be immune from recession. The underlying assumption is that it is "normal" for the government to blithely keep expanding, regardless of the ability of the private economy to pay for it.

So how is the government supposed to keep expanding in a recession? The New Republic's Jonathan Cohn makes it a little more explicit.

"Stabilizing the public-sector workforce or, better still, increasing it would be among the very easiest things for the federal government to do: It can simply write checks to state and local government, as it did with the Recovery Act and has traditionally done during times of economic distress."

If you are in personal financial stress because of the recession, take heart! Expanding your spending is the easiest thing to do. Simply write checks.

Of course, this would be a disaster if a private individual tried it. So why do we think it will work if the government tries it?

Economist Josh Bivens gives us the last piece of the puzzle. We can keep borrowing to pay for government stimulus, he says, "Because there is no discernible upward pressure on interest rates."

True enough. There is no upward pressure on interest rates--at the moment. By the time upward pressure comes, however, nations tend to have built up such a vast, unserviceable debt that they end up in an "interest rate death spiral." When interest rates finally rise, governments have to make huge payments just to cover the interest on their debt. If they try to get the extra money by raising taxes and cutting government spending, they plunge their economies into recession, which decreases their revenues and increases their costs further. That makes them even less solvent and causes lenders to raise their interest rates yet again. It is a vicious cycle that usually ends in default and national catastrophe.

Aren't we all watching this happen in Europe right now? In countries like Greece and Italy they implemented the policies of our sage American economists to the letter. Following the advice of Mr. Krugman, they propped up their economies by maintaining a "normal" rate of growth of government employment and the welfare state. Following the advice of Mr. Cohn, they paid for it all by simply writing checks. And following the advice of Mr. Bivens, they didn't worry about their ever-increasing debt because there was no upward pressure on interest rates. Until, suddenly, there was.

Years ago, the great free-market economist Henry Hazlitt wrote a book called Economics in One Lesson. The "one lesson" is: "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." If Krugman and his ilk followed this rule, they might ask such question as: why can't we continue to increase the government payroll indefinitely? Why can't we simply go on writing checks? Why can't we assume that interest rates will flop around near zero forever?

If they asked, they might find a specific answer.

Hazlett's book was in many ways just a popularization of the great 19th-century economist Frederic Bastiat's essay "What Is Seen and What Is Not Seen." Bastiat pointed out that government spending has certain seemingly positive consequences that are seen by everyone--say, a new bridge is built with government money. But what we don't see is what might have been done with that money if it had been left in private hands--the house or factory or research lab that might have been built instead. It is the economist's job to project what is not seen, the alternative uses for money taken and spent by the government, and to tally up the hidden costs of the showpiece projects that are displayed to the public.

In this case, what Obama and his defenders want us to see is the beneficial effect of government employment, the people who would prosper by bringing home a state or municipal paycheck. What they want us not to see are all of the private-sector jobs that haven't been created.

This has a direct partisan goal, of course, which is to draw our attention away from the current administration's most conspicuous failure. But it also reflects a deeper ideological agenda: a suspicion of private-sector economic activity as being driven by greed and profit, while public-sector employment is noble, selfless, and public-spirited. So they naturally lavish more concern on the latter than on the former. Never mind that public employees can become a special interest of their own, cashing in at the expense of others, as voters from Wisconsin to San Jose have discovered. Consider, rather, the moral and economic inversion of this perspective: those who consume wealth produced by others are assumed to be good, while those who actually produce the wealth in the first place are painted as the bad guys.

Yet this is the key to Obamanomics: to focus on government action, government spending, government hiring as the key to everything, while disparaging private profit-making.

It is also the reason why Obamanomics is failing, because there is a fundamental difference between public and private employment. Public employment is not self-sustaining. Precisely because it is not oriented toward profit-making, it does not pay for itself. It relies on all of those denigrated profit-makers of the private sector to pay for it. They can pay for it precisely because they are profit-makers. A profit is simply the net creation of wealth. It means that the economic value you created from a business--the goods and services you were able to sell--have greater economic value than the resources you put into running the business and paying its workers. It is your profit, the extra money left over after you pay your expenses, that allows you to expand your business, prosper and yes, hire more people. But increased private-sector employment is a consequence. Profits are the driver.

If you don't make a profit, by contrast, your business dies. For example, you might end up pouring hundreds of millions of government dollars into building a giant new solar-panel factory that stands empty and idle because you can't actually afford to run it.

Private profit, if you make it, is also a ready pool of extra money for government to raid to pay for its expenses. Public employment is dependent on the wealth created from private production and private profit. So what happens when you denigrate private production and private profits, while constantly increasing public employment and public spending? Eventually, you don't have enough of the one to support the other. You cross the Thatcher Line.

British Prime Minister Margaret Thatcher famously said (in a radio interview) that the problem with socialism is that you eventually run out of other people's money to spend. This has been formalized as the Thatcher Line: the point at which the burden of government begins to overwhelm the ability of the private sector to pay for it.

The Thatcher Line explains the recent wave of reforms on the state and local level. While President Obama complains that state and local governments have been laying off workers, he has apparently never bothered to ask why they can't afford to hire anyone. It turns out that it's not because state and local governments have no money. It's because spending on government employees naturally tends to expand faster than the ability of the private sector to pay for it.

Bloomberg's Josh Barro fills in the details for San Jose, California, a city that has seen its tax receipts grow by 19% over the past ten years, while the cost of hiring a full-time public employee has gone up by 85%. Is it any wonder, then, that the people of San Jose voted overwhelmingly for a referendum to rein in government wages and benefits--on exactly the same day that voters in Wisconsin decided to keep Governor Scott Walker. They are trying to pull back from the Thatcher Line.

Europe is crashing straight through the Thatcher Line. In Greece, the public sector employs about one-third of all workers. Even the country's supposed "austerity" program has been designed to protect the public sector. In the first three years of the economic crisis, 470,000 private-sector workers in Greece lost their jobs. How many government workers lost their jobs? None. A few months ago, the country was convulsed with riots when the government finally agreed to lay off a mere 15,000 government workers.

Does this sound familiar? It is the same mentality that shrieks that a few hundred thousand government workers are now, five years after the beginning of the recession, finally starting to lose their jobs, while it placidly declares that the private sector, where millions have been shoved into the ranks of the long-term unemployed, is "doing fine."

That's why the "doing fine" gaffe is so significant. It shows us, in one lesson, the real essence of Obamanomics--and where it is taking us.


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Calafia Beach Pundit: Tax thought of the day

Tax thought of the day

I take it that it is best for all to leave each man free to acquire property as fast as he can. Some will get wealthy. I don't believe in a law to prevent a man from getting rich; it would do more harm than good. So while we do not propose any war upon capital, we do wish to allow the humblest man an equal chance to get rich with everybody else. [Applause.] When one starts poor, as most do in the race of life, free society is such that he knows he can better his condition; he knows that there is no fixed condition of labor, for his whole life. I am not ashamed to confess that twenty five years ago I was a hired laborer, mauling rails, at work on a flat-boat---just what might happen to any poor man's son! I want every man to have the chance---...---in which he can better his condition ---when he may look forward and hope to be a hired laborer this year and the next, work for himself afterward, and finally to hire men to work for him! That is the true system.

Portion of a speech by Abe Lincoln, New Haven CT, March 6, 1860 (HT: Russell Redenbaugh)

I doubt that many politicians, right or left, would disagree with Lincoln (however, I have my doubts about Obama, since he is an unabashed advocate of income redistribution). Nevertheless, as is the case with monetary policy that seeks to control exchange rates—wherein the more effort expended to keep a currency from falling, the greater the likelihood that it will fall—so it is with incomes policies. The more effort expended to equalize incomes through the use, for example, of standard deductions, earned income tax credits, and progressive taxation rates, the more difficult it becomes for the poor to climb the ladder of success. Most people are in favor of helping the poor become rich, but too often the best of intentions produce unwanted results.

Under highly progressive tax regimes, the marginal tax rate faced by the poorest becomes extremely high as their income increases, thus discouraging greater work effort. At very low levels of income, deductions and tax credits can make effective tax rates negative, but at higher levels of income, those deductions and tax credits disappear, making effective marginal rates much higher than statutory rates. Thus, some of the very poorest can make more money by not working, or by working very little, than by working a lot harder. The moderately poor can see almost all of their increased work effort gobbled up by the tax system. This is the unintended consequence of a progressive tax rate structure: that it makes climbing the wealth ladder extremely difficult, thus locking in poverty those it would seek to help—and in the process, making them more and more dependent on government largess. See an excellent of this here, as it applies to subsidies for healthcare costs under Obamacare.

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Thursday, June 14, 2012

Ann Coulter: Obama's public sector full employment plan


Ann Coulter Letter

Obama's public sector full employment plan

By: Ann Coulter
6/13/2012 05:01 PM

Last week, President Obama said "the private sector is doing fine." This was not reassuring to those of us who suspect the Democrats haven't the first idea what "private sector" means.

He did not help matters by becoming lachrymose over the suffering of public sector employees: "Where we're seeing weaknesses in our economy have to do with state and local government. ... And so, if Republicans want to be helpful, if they really want to move forward and put people back to work, what they should be thinking about is, how do we help state and local governments ..."

When Democrats say the public sector is suffering, they mean public sector employees have half the unemployment rate of the rest of the country -- 4.2 percent compared to 8.2 percent.

Obama's monumentally idiotic statement has led his media defenders to recycle Mitt Romney's alleged "gaffe" from several months ago, when he said: "I like being able to fire people who provide services to me."

But that was not a gaffe at all -- except as deceptively edited by the media to end after the word "people." (Only Donald Trump enjoys firing people, and by the way, people love watching Donald Trump fire people.)

Far from a gaffe, Romney's actual sentence is the key to understanding the nation's health care crisis -- which happens to be exactly what he was talking about.

Nearly every product you can think of has gotten better and cheaper in the last 20 years because of market competition: cell phones, television sets, computers, food delivery, airline tickets (constrained by the cost of fuel), express mail, and on and on.

There aren't a lot of restaurants serving lousy food or dog walkers who lose your dog because they'd go out of business pretty fast if they provided rotten services. They're not the only game in town.

But you know what is the only game in town? The government, including putatively private businesses that are heavily regulated by the government. Only with the government do we continuously get worse service for a higher price.

Take away the ability to fire people, and you have airport security, public schools, Veterans Administration hospitals, the Postal Service, General Motors and Pinch Sulzberger, New York Times family scion.

Health insurers may technically be private companies, but they are required by law to cover a slew of services, making them an extension of monopolistic government. (Similarly, the old AT&T was a "private" company, but in reality it was just a government-run monopolistic phone company providing no choice, poor service, little innovation and obscenely high prices.)

In most states, you can't choose a health insurance plan that doesn't cover gambling and sex addictions, psychological counseling, speech therapy and prenatal care -- even if you plan on never having children.

Health insurance companies don't need to compete for your business -- they're all offering the same product, anyway. Moreover, because of government regulation concerning how health insurance is taxed, most people aren't choosing their insurers. Their employers are.

As a result, insurance companies have become outrageously unresponsive to both patients and doctors. Insurance companies need only concern themselves with satisfying government regulators and corporate purchasers. Meanwhile, doctors have to please only the insurance companies, which don't particularly care how patients are treated, as long as it's cheap.

This is a third-party-payer problem, or as the proverb goes, "He who pays the piper calls the tune." All third-party-payer systems are disasters. The customer is trapped, forced to pay for something he doesn't want, with no one to complain to and no possibility of taking his business elsewhere.

An example frequent travelers will recognize are the online discount hotel brokers. These can be great -- unless you arrive at a hotel and there's no WiFi, or there's massive construction going on, or your room isn't available until four hours after check-in time. But you've already paid the full price to the booking company.

If you had paid for the room yourself, you could walk away and find another hotel. (Even if you used a credit card, you can reverse the charges because, again, credit card companies would go out of business if they didn't refuse payment for scams.) But if you booked through a third party, the hotel tells you, "Sorry, take it up with Expedia."

Ironically, Romney is proposing that all Americans have the same ability he has to hire and fire insurance companies and doctors. The rich already can do this. Why can't the rest of us? We hire -- and fire -- our own appliance stores, pet groomers, restaurants, hairdressers and computer companies. Why not health providers?

And why are the media so desperate to avoid that conversation?

We need a free market in health insurance, which Congress could accomplish with a one-page bill stating, "There shall be interstate commerce in health insurance." Once we were allowed to purchase health insurance across states lines -- prohibited by law today -- everyone would be buying insurance from companies based in states such as Utah, which have the fewest mandates about what health insurers must cover.

Insurance companies would be responsive to us, the people buying their services, and not the government or corporations. Most people would choose to buy insurance only for what insurance is intended for -- catastrophes -- while paying for regular checkups themselves, the same way we pay for our own cell phones, computers, baby sitters, manicures and everything else that's been getting better and cheaper, unlike all government-regulated services.

Doctors would then have to be responsive to us, not to our insurance companies. Nothing improves the quality of a service like being able to fire the people providing it. The media don't want you to think about that, so they edit Romney's remark and call it a "gaffe."

For better service right now, for example, the American people need to fire Barack Obama and hire Mitt Romney.


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Sunday, June 3, 2012

Future tense, X: The fourth revolution by James Piereson - The New Criterion

Future tense, X: The fourth revolution

The United States has been shaped by three far-reaching political revolutions: Thomas Jefferson's "revolution of 1800," the Civil War, and the New Deal. Each of these upheavals concluded with lasting institutional and cultural adjustments that set the stage for new phases of political and economic development. Are we on the verge of a new upheaval, a "fourth revolution" that will reshape U.S. politics for decades to come? There are signs to suggest that we are. In fact, we may already be in the early stages of this twenty-first-century revolution.

The great recession that began in 2008 caused many to suggest that the United States is entering a period of "decline" during which it will lose its status as the world's most powerful and prosperous nation state. The metaphor of "decline" presumes that the American people will sit by passively as their standard of living and international status erode year by year. That is unlikely to occur: Americans will do everything in their power to reverse any such process of national decline. Thus, what the United States is now facing is not a gradual decline but a political upheaval that will reshape its politics, policies, and institutions for a generation or two to come. There is no guarantee that the nation will emerge from this crisis with its superpower status intact, just as there were no guarantees that it would emerge from the Civil War or the Great Depression in a position to extend its wealth and power. The most that we can say is that, in the decade ahead, Americans will struggle to forge a governing coalition that can guide the nation toward a path of renewed growth and dynamism.

The financial crisis and the long recession, with the strains they have placed upon national income and public budgets, are only the proximate causes of the political crisis now unfolding in the United States. The deeper causes lie in the exhaustion of the post-war system of political economy that took shape in the 1930s and 1940s. One pillar of that system emerged out of the New Deal with its emphasis upon national regulation of the economy, social insurance, expanding personal consumption, and public debt; the second emerged out of World War II with the U.S. dollar as the world's reserve currency and the U.S. military as the protector of the international trading system. The post-war system created the basis for unprecedented prosperity in the United States and the Western world. That system is now unwinding for several reasons, not least because the American economy can no longer underwrite the debt and public promises that have piled up over the decades. The urgent need to cancel or renegotiate these debts and public promises on short notice will ignite the upheaval referred to here as "the fourth revolution." There will follow an extended period of conflict in the United States between the two political parties as they compete for support either to maintain the post-war system or to identify a successor to it.

It is not possible to outline in advance the precise lineaments of the fourth revolution. After all, few Americans living in 1798, 1858, or 1928 could have foreseen what was going to happen to their country in the years immediately ahead. The best that we can do is to look for some general patterns in these earlier events that might serve as guides for what is likely to happen in the United States in the next decade or two.

Notwithstanding its reputation for stability and continuity, the U.S. political system seems to resolve its deepest problems in relatively brief periods of intense and potentially destabilizing conflict. These events are what some historians have called our "surrogates for revolution" because, rather than overthrowing the constitutional order, they adjust it to developing circumstances.

There are a few clear reasons why the American system adjusts in this discontinuous fashion. The constitutional system, with its dispersed powers and competing institutional interests, resists preemptive and over-arching solutions to accumulating problems. At the same time, America's dynamic economy and highly mobile society are constantly creating new challenges to which the political system cannot easily respond. At times, these challenges have built up to a point where the differences between parties and interests have been so fundamental as to defy efforts to resolve them through the ordinary channels of politics.

There are a few superficial similarities in the structure of these earlier events that might provide clues as to what we might look for in any new upheaval. These events—Jefferson's revolution, the sectional conflict, and the crisis of the 1930s and 1940s—extended over several election cycles before producing a stable resolution; the political settlements that emerged from these conflicts lasted roughly a lifetime—sixty or seventy years—until they began to unravel under the pressure of new developments; and each event ended with the ouster of the political party that had dominated the system during the previous era.

At a deeper level, each of these realignments discredited an established set of governing elites and brought into power new groups of political and cultural leaders. After reorganizing national politics around new principles, these new elites took control of the national government, staffing its departments and agencies with their political supporters. As they strengthened their control over the system, they also gradually extended their influence into important subsidiary organizations, such as newspapers, college and university faculties, book publishers, and civic associations. College and university faculties and our major newspapers today are overwhelmingly Democratic; from the 1870s into the 1930s, they were generally Republican. This is one of the factors that cements any realignment in place and gives it the stability to persist over many decades.

One can also identify in all three cases an abrupt change of policy, a broken agreement, or some perceived violation of faith that poisoned relations between the parties, drove them further apart, and closed off possibilities for compromise. The Federalists' passage of the Alien and Sedition Acts (1798), which opponents saw as an attempt to criminalize criticism of the Adams administration, provoked all-out warfare with Jefferson's fledgling party and convinced Jefferson and James Madison that their ultimate goal should be the destruction of the Federalist Party. The Democratic Party's repeal of the Missouri Compromise in 1854 brought the Republican Party into existence and sharpened the sectional conflict by several degrees. In 1932, FDR claimed (falsely in this case) that the bankers and industrialists had caused the Depression by irresponsible speculation in stocks. Because of this violation of trust, he declared that their activities would have to be supervised more closely by federal authorities.

More fundamentally, each of these realignments was carried out and then maintained by one dominant political party. Following the election of 1800, Jefferson's (and later Jackson's) Democratic party defined the parameters of political competition until the outbreak of the sectional crisis in the 1850s. The Republican Party led the nation through the Civil War and maintained its dominant status throughout the post-bellum era of industrial development. In the midst of the Great Depression, FDR's Democratic Party organized the modern system around the politics of public spending and national regulation. The Democrats completed this revolution after World War II when the United States began to assume responsibilities in the international arena commensurate with those it had already assumed in the domestic economic arena.

The dominant parties in each of these eras might be called "regime parties" because they were able to use their political strength to implement and carry forward the basic themes around which these political settlements were organized. Jefferson's party pushed forward the themes of localism, democracy, and expansion; Lincoln's, the themes of union, freedom, and capitalism; FDR's, the themes of national regulation, public spending, and internationalism. In this sense, the United States has rarely had a two-party system but rather a one and one-half party system consisting of a "regime party" and a competitor forced to adapt to its dominant position. These competitors—the Whigs in the 1840s, the Democrats after the Civil War, and the Republicans in the post-war era—occasionally won national elections, but only after accepting the legitimacy of the basic political themes established by the regime party.

The question today, then, is whether or not the party system formed in the 1930s and 1940s is about to exhaust itself in a new upheaval that will lead to some new political alignment around a new constellation of issues. There is little doubt that many of the political signs present in earlier upheavals are increasingly in play today.

The Democratic Party established itself in the 1930s and 1940s as the "regime party" in modern American politics by building majorities around the claims that it pulled the country out of the Depression and won the war against fascism. Democrats won five consecutive presidential elections from 1932 to 1948, comparable to the six straight ones won by Jefferson's party between 1800 and 1820 and the six won by Republicans from 1860 to 1880. Throughout the period from the 1930s into the 1980s, Democrats consistently maintained control over both houses of the U.S. Congress. This electoral strength gave the Democrats solid control over the institutions of the national government.

Given the popularity of FDR and the New Deal, Republicans had little choice but to accept the general contours of the new regime. Following their landslide defeat in 1936, Republicans nominated a succession of presidential candidates—Willkie, Dewey, Eisenhower, and Nixon—who did not challenge New Deal programs but promised only to administer them more effectively. Among Republican candidates between 1940 and 1980, only Barry Goldwater sought to roll back the New Deal, and his defeat in 1964 was taken as evidence of the futility of that strategy.

Over the decades, the Democratic Party has built its coalition around public spending and the recruitment of new groups into the political process, often by promises of new public programs. It has displayed a remarkable capacity to renew itself by adjusting its appeals to the ever-changing political marketplace. In the 1930s, FDR built his coalition around urban workers, farmers, and industrial unions with appeals that grew out of the grim realities of mass unemployment and destitution. By the 1960s, John F. Kennedy and his successors succeeded in broadening the Party's appeal to the middle class and suburban home owners by pushing "quality of life" themes like environmentalism, civil rights, women's rights, and government support for the arts. Later, as private sector unions began to disappear in the 1970s and 1980s, Democrats replaced them in several key states by organizing public sector unions and mobilizing them into their party. In many states, these unions provide the organizational backbone of the Party by supplying votes and money and serving as well-placed advocates for further public spending. The Democratic Party has gradually evolved into a "public sector party" that finds its votes and organizational strength in public sector unions, government employees and contractors, and beneficiaries of government programs.

Many thoughtful observers argue that the New Deal alignment came apart in the 1960s and was replaced by Ronald Reagan's conservative revolution in the 1980s. There is something to be said for this view. Since the 1980 election, Republicans have achieved rough electoral parity with the Democrats, winning five of eight presidential elections and winning control of the House and Senate in roughly half of the elections that have taken place since that time. The Republicans, much in contrast to the Democrats, have organized themselves in recent decades as a "private sector party," winning votes and contributions from individuals and business groups committed to cutting taxes and reducing the size and scope of government.

Despite their electoral successes since the 1980s, Republicans never managed to reverse the flow of political power to Washington and failed to eliminate or substantially reduce any of the New Deal or Great Society social programs. Federal spending on domestic programs grew nearly as quickly under Republican as Democratic administrations. Republicans have on occasion tried to balance the budget or tinker with Social Security and Medicare but were rebuffed by Democrats who accused them of trying to destroy these popular programs. Republican governors and mayors, like their Democratic counterparts, continue to make their pilgrimages to Washington in search of grant money and subsidies for their states and cities, just as members of Congress from both parties run for reelection by pointing to the federal funds they have brought back to their states and districts.

Nor have Republicans had much success in penetrating leading cultural and educational institutions on behalf of ideas that have wide support among voters. College faculties and editorial boards are more resolutely Democratic and liberal today than they were in the 1960s. Republicans have so far been unable to parlay their considerable electoral success into commensurate influence over cultural, journalistic, and educational institutions. Conservatives, in fact, have done something altogether different: they have created their own newspapers, magazines, think tanks and research institutes, and colleges and schools to circulate their ideas. They have, in effect, formed their own "counter-establishment" through which they communicate with their supporters and wage ideological warfare against Democrats. The two parties increasingly live in their own political and philosophical worlds, a fact that obviously drives their members further apart and makes compromises between them ever more difficult to achieve.

This evolution has now produced a volatile and potentially destabilizing alignment between the two major parties, with one rooted in the public sector and the other in the private sector, and with each communicating mainly with its own supporters. In the past, political parties were coalitions of private interests seeking influence over government in order to facilitate their growth within the private economy. This was true of early party conflicts that pitted commerce against agriculture or the later splits between slavery and free labor or business against organized labor. The regional and sectional conflicts of the past were also of this character. This was in keeping with the small government bias of the Constitution in which the government itself was never supposed to emerge as a political interest in its own right.

The conflict today between Democrats and Republicans increasingly pits public sector unions, government employees and contractors, and beneficiaries of government programs against middle-class taxpayers and business interests large and small. In states where public spending is high and public sector unions are strong, as in New York, California, Illinois, and Connecticut, Democrats have gained control; where public sector interests are weak or poorly organized, as in most of the states across the south and southwest, Republicans have the edge. This configuration, when added up across the nation, has produced a series of electoral stand-offs in recent decades between the red and blue states that have been decided by a handful of swing states moving in one direction or the other.

This impasse between the two parties signals the end game for the system of politics that originated in the 1930s and 1940s. As the "regime party," the Democrats are in the more vulnerable position because they have built their coalition around public spending, public debt, and publicly guaranteed credit, all sources of funds that appear to be reaching their limits. The end game for the New Deal system, and for the Democrats as our "regime party," will arrive when those limits are reached or passed.

This point will arrive fairly soon for the following reasons: (1) unsustainable debt; (2) public promises that cannot be fulfilled; (3) stagnation and slow growth; and (4) political paralysis. The last point is important because it means that the parties will fail to agree on any preemptive solutions to the above problems until they reach a point of crisis.

1. Everyone is aware of the accumulated U.S. debt: $16 trillion by the end of 2012, which amounts to more than the nation's Gross Domestic Product of about $15.5 trillion. Of this debt, about $11 trillion rests in public hands and the remainder is in government accounts. This year, the federal government will pay about $275 billion in interest payments on the debt, or about 6 percent of a federal budget of $3.8 trillion. The interest on publicly held debt (which comes to another $200 billion annually) is paid with government "IOU's" that will be redeemed in the future out of tax revenues. Interest rates are at a historically low point, a condition that is unlikely to last much longer. It is possible that within a few years, if creditors demand higher rates to purchase our debt, our government could be spending as much as 20 percent of its revenues on interest payments. Those payments must be made at the expense of existing programs, including defense, Medicaid, Medicare, education, and Social Security. No one can foretell when credit markets may decide that our debt is too risky to hold at these interest rates. Since foreign governments hold more than a third of our public debt, they could decide as a matter of policy to sell U.S. debt and invest their resources elsewhere. Such an event in and of itself would precipitate a crisis in our public accounts.

The above does not begin to address all of the unstated or "unofficial" liabilities of the U.S. government, such as promises made to Social Security and Medicare beneficiaries and sums needed to back up federal mortgage guarantees. Some estimate that these liabilities could run as high as $50 trillion. In addition, many state governments have had difficulty balancing their budgets, and some have been able to do so only because of large transfers from the federal government in the 2009 stimulus package and increased payments for education, transportation, and social services in recent federal budgets. State employee pension programs are notoriously underfunded because states have deferred annual payments in order to meet other pressing obligations and the returns on these funds have been well below actuarial assumptions. A recent study suggested that the real value of these obligations across the country is more than $5 trillion while states have put aside only about one-third of this amount in current trust funds. What will the states do when employees line up to collect payments to which they feel they are entitled?

2. In addition to such debt and credit issues, the finances of federal entitlement programs are similarly approaching a point of crisis and insolvency. The most expensive entitlement programs are for old age pensions (Social Security) and health care (Medicare). Currently the U.S. government spends about $725 billion annually on Social Security and $650 billion on Medicare, or about $1.4 trillion on the two program combined, or more than one-third of total federal expenditures. There are now about 45 million people eligible for Medicare and 44 million for Social Security. These numbers are about to explode due to the impending retirement of the "baby boom" generation, or those born between the years 1946 and 1963. There are currently between 75 and 80 million baby boomers, the leading edge of which reached age 65 in 2011. By the year 2025, there will be close to 80 million Americans, and perhaps several million more, who will be eligible to receive benefits under Social Security and Medicare. Given their likely longevity, they will be collecting benefits for years into the future. Meanwhile, they will be retiring from the work force almost as quickly as new entrants are joining. There are now about 125 million people working on a full-time basis in the United States, a number that is expected to grow far more slowly each year than the number of new retirees. In a dozen years or so, we may have as many as 80 million people collecting old age benefits against a working population of 130 or 135 million, and in a fiscal situation in which the federal government is already deeply in the red. These promises cannot be fulfilled without bankrupting the government or the taxpayers, or without strangling the private economy with excessive taxes. This situation by itself has the potential to create a political upheaval.

One might ask why our government has not made preparations for a development that has been in the making for the past
sixty-five years. Far from making preparations for this event, the political authorities have done several things in recent years to make the problem even more acute. In 2001, the Congress passed an expensive prescription benefit program for seniors without providing the funds to pay for it. Many blame President George W. Bush and the Republican Congress for this, but it was not entirely their fault alone, since the Democrats in Congress proposed an even more expensive program than the one that was eventually passed. In 2009, President Obama, with a Democratic Congress, passed a new health care entitlement program to guarantee coverage for the 40 million or so Americans without health insurance, but paying for it by taking $50 billion per year from Medicare, thus further stretching a system that was already on the path to insolvency. In addition, the U.S. government has taken annual surpluses from the Social Security Trust Fund and applied them to deficits arising in the overall federal budget. This accounts for a large share of the $5 trillion or so in debt held internally by the government. Beginning in 2009, the Social Security Trust Fund began to run a deficit, and will remain in deficit for at least another twenty years until the baby boom generation passes through the system. What this means is that the U.S. government will have to make up the funds it has borrowed from the Trust Fund from annual tax revenues.

3. Then there is the problem of stagnating economic growth. The United States needs a rapidly growing economy to produce the income and wealth to pay for these expensive government programs. After all, tax revenues have to be taken from the private sector; the public sector does not generate wealth on its own. Yet, decade by decade, growth has been slowing down in the United States. During the 1950s and 1960s, real GDP grew by an average of 4.3 percent per year, but during the decade of the 1970s, that rate fell to 3.7 percent. It fell further in the 1980s to 3.5 percent, and during the 1990s to 3.2 percent. Following the technology "bust" and recession of 2000, GDP grew from 2000 to 2008 by a rate of 2.6 percent per year, but if we factor in the recession of 2008 and 2009, GDP grew at a rate of 1.7 percent per year for the whole decade of 2000 to 2009. Now, in the past three years, we have bounced out of a very steep recession with only tepid rates of growth of around 2 percent per year. Forecasters expect this trend to continue for years into the future, partly owing to the burdens of debt and the need to pay it down.

There are many possible reasons for this slowdown in growth. A mature economy tends to grow at a slower rate than an emerging economy. Some suggest that the rate of technological progress has slowed down over the past thirty or forty years, contributing to the slowdown in growth. Whatever the cause, long-run stagnation will make it impossible to pay off the promises the federal government has made.

4. But isn't it possible for Congress and the President to step in now to formulate a strategy to deal with these problems before they reach a crisis point? Various proposals have been set forth: the Bowles-Simpson plan, for example, and other plans to reduce the budget deficit over a ten-year period. To their credit, Republicans in Congress have stepped forward with a plan to reform Medicare and Medicaid and to re-write the tax code so that it encourages economic growth. Thus far, the Democrats have been silent. In any case, such proposals are unlikely to be adopted. For one thing, the problems are too large to be dealt with in any preemptive fashion. The prospect of cutting the federal budget by more than a third is hard to contemplate for politicians who have grown up in an environment of affluence and abundant resources. In addition, it is unrealistic to look to our political process to solve a problem that it has been instrumental in creating.

The regime of public spending has at last drawn so many groups into the public arena in search of public dollars that it has paralyzed the political process and driven governments to the edge of bankruptcy. These groups are widely varied: trade associations, educational lobbies, public employee unions, government contractors, ideological and advocacy organizations, health-care providers, hospital associations that earn revenues from Medicare and Medicaid programs, and the like. These are what economists call rent-seeking groups because they are concerned with the distribution of resources rather than with the creation of wealth. They consume rather than create wealth. These groups are highly influential in the political process because they are willing to invest large sums in lobbying and election campaigns in order to protect their sources of income. While rent-seeking groups can be found in both political parties, the largest and most influential of them (at least on the spending side) have congregated within the Democratic Party. To expand on what was said earlier, one might describe the Democratic Party as a coalition of rent-seekers.

Rent-seeking coalitions have little interest in moderating their demands in the interests of the broader economy because, as their leaders reason, the economy will be little affected by the small share of it to which they are laying claim. In addition, they calculate that if they do not take the money, then someone else will—and so they are not inclined to be "fools" for the public interest. But since the leaders of all rent-seeking groups think this way, the interest group system as a whole operates with little concern for the requirements of economic growth and wealth generation. This is one reason why, in times of crisis, rent-seeking coalitions demand tax increases to pay for their programs instead of recommending policies to accelerate growth.

The late economist Mancur Olson has argued that economies tend to grow more slowly as rent-seeking coalitions become pervasive and ubiquitous, since they divert resources from wealth-creating to wealth-consuming uses. This is one reason, he argues, why the United States grew so rapidly in the nineteenth century, and why West Germany and Japan grew so rapidly in the two or three decades after World War II. At such times, these economies were open to investment and entrepreneurship, and, as a consequence, they enjoyed historically high rates of growth. With the passage of time, all of these systems were gradually encumbered by coalitions seeking benefits through the state. Political paralysis and slow growth, Olson argues, are by-products of political systems captured by rent-seeking coalitions. These groups, operating collectively, can block any overall effort to cut spending or to address the problems of deficits and debt.

The political problem is compounded because the two political parties have diverged to a point unknown in our lifetimes and not seen in America since the upheavals of the 1850s. In the post-war era, during the 1950s and 1960s, it was possible to pass bipartisan legislation with majorities or near majorities of both parties. The Civil Rights Bill of 1964 was passed with a coalition of northern Democrats and Republicans against the opposition of Democrats in the south. Medicare was likewise passed with bipartisan majorities. During the 1970s, the two parties began to diverge into liberal and conservative wings in a process that has continued to the point where, today, there is no ideological overlap between the two congressional parties—that is, the most conservative Democrat is more liberal than the most liberal Republican. Thus the two parties must increasingly bargain like foreign adversaries who fundamentally distrust one another, rather as the pro- and anti-slavery forces bargained during the 1850s. Because of this divergence, there will be no "grand bargain" or preemptive solution to America's fiscal crisis.

What, then, is likely to happen? The United States will lurch forward for a few years yet, borrowing still more money to finance our public programs and putting off, for a time, any serious measures to address the problems of spending and debt until some event intervenes to force our hand. The United States has placed itself in a position in which it is vulnerable to any number of unforeseen and uncontrollable events. The bond markets could revolt against increasing levels of debt. Interest rates could rise to ruinous levels. A major bank or two might fail, precipitating a new financial crisis. A war or revolution in the Middle East could cause a spike in oil prices. Terrorists might strike again. We could face a new recession before we have fully recovered from the last one. Europe could go into recession as a result of its own debt crisis, thereby curbing the demand for American exports. Because the United States is already skating on thin ice with little room to maneuver, any or all of these events would bring the current system to a point of crisis where Congress would have to slash spending and renegotiate promises it has made. At this point the United States would enter uncharted political territory.

This would be the ultimate challenge for a political regime organized around public spending and debt. It would immediately lead to a highly charged political situation in which incumbents are voted out of office, interest groups battle to protect their pieces of the budget, and the political parties struggle to keep their electoral coalitions intact. As this process unfolds, Americans may then witness the kinds of events not seen in this country since the 1930s or, even, the 1850s and 1860s: protesters invading the U.S. Capitol, politicians refusing to leave office after they have lost elections, defiance of the Supreme Court, the emergence of new leaders, and, possibly, the formation of new political parties. All of this can be expected from a process in which an entrenched system of politics withers and dies and a new one is gradually organized to take its place.

Does the "fourth revolution" imply the "end of America," as some have suggested? Not necessarily, though one must acknowledge the possibility that this upheaval might end badly, perhaps in an extended period of political conflict and paralysis that yields no constructive outcome. Yet, based on the evidence of the three previous revolutions, American voters are unlikely to support for very long any party that fails to enhance their standard of living or the nation's position in the world.

If the three previous revolutions offer any lessons, then there is every chance that the United States will emerge from this crisis with new momentum to develop its economy and provide leadership for the world.

President Obama came to office in 2008 promising to be all things to all people, or at least many things to many people. Above all, he was determined to be a revolutionary president, one who ushered in a new era of progress guided by an activist government. He announced his candidacy in Springfield, Illinois, thus identifying with Abraham Lincoln. He won the endorsement of the Kennedy family as the heir apparent of JFK's legacy. When he came to office, he called on memories of FDR with the idea that he (like FDR) would guide the nation out of a depression. More recently, he adopted the mantle of Theodore Roosevelt and his program for a "new nationalism." Of late he has sounded like Harry Truman running against a "do nothing" Congress. Has he learned the right lessons from history?

Unfortunately, in trying to emulate FDR and his other predecessors, who were operating under far different circumstances, President Obama made all of our current problems worse. His stimulus and budget packages added to the national debt without doing anything to stimulate economic growth. He spent his first two years passing an expensive health-care bill instead of focusing on steps to promote recovery and growth. By ramming all of these measures through on narrowly partisan votes, he destroyed the comity between the parties. On the health-care bill, he broke the longstanding agreement between the parties that important pieces of social legislation should be passed on a bipartisan basis. He has thus managed to divide the public without doing much to solve the problems he was elected to address.

Many analysts expect President Obama to be reelected this November. Perhaps the odds favor him. After all, it is difficult to unseat an incumbent. Yet, the economy is still weak, his policies have not succeeded in turning it around, and he is not widely popular. No matter how it turns out, this year's presidential election is likely to sharpen, rather than to resolve, political divisions in the United States. Despite all this, President Obama is unshaken in his presumption that he is a herald of a new era, a revolutionary on the models of Jefferson, Lincoln, and FDR. But is it possible that he will instead turn out to be something much different, a modern day Adams, Buchanan, or Hoover—that is, the last representative of a disintegrating order? Such a denouement is not only possible but, in view of our situation, more and more likely.

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Debt Up $1.59T Under GOP House—More in 15 Months Than First 97 Congresses Combined |

Found this interesting link on the Drudge Report:

Debt Up $1.59T Under GOP House—More in 15 Months Than First 97 Congresses Combined |

The Official Drudge Report iPhone, iPad or iPod Touch app available in the iTunes App Store:

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