Governments are ignominiously incompetent at framing problems before they propose solutions.  Put many governments, each with a different objective, together in a single conference with the implied pressure to agree on a world solution to an ill-defined problem, and you have a formula for doing more harm than good.  Thus describes the situation at the Copenhagen summit on climate change.

The meeting has as its premise the theory that economic development produces effluents that cause the earth’s atmosphere to trap a larger portion of the sun’s radiation, as a greenhouse does.  These greenhouse gases (GHG), the theory goes, must be reduced in order to prevent the earth from overheating, typically defined as an increase of two degrees Celsius.  The gases and their relatively contributions to the greenhouse effect are: carbon dioxide, CO₂ (85.4%), methane (8.2%), nitrous oxide (4.4%), and other gases that deplete ozone (2.1%).¹  The first three occur naturally in the atmosphere and can be absorbed by “sinks” such as forests and oceans.  Most of the focus on GHG reduction is obviously on CO₂; the atmospheric concentration of which increased 36% since the Industrial Revolution in 1750.  Therefore, the theory says, decreasing these “carbon emissions” will prevent global warming.

As last week’s revelation of attempts to squash the views of scientists who disagree with this theory showed, the science is far from perfect.  Perhaps the leading scientist who does not view carbon emissions as a problem is John Cristy of the University of Alabama in Huntsville. Early this year, he testified before Congress² that, “… the actions being considered to ‘stop global warming’ will have an imperceptible impact on whatever the climate will do, while making energy more expensive, and thus have a negative impact on the economy as a whole.  We have found that climate models and popular surface temperature data sets overstate the changes in the real atmosphere and that actual changes are not alarming.”  Cristy relies on satellite data to more accurately measure the earth’s temperature than the traditional ground based stations that are affected by urbanization and that are provenance of the data used by global warming proponents.

Even if, in spite of the contentious science, one concedes the postulate of climate change, the cost of reducing carbon emissions is high, estimated at $150 billion annually through 2020.³  The Heritage Foundation estimates that the annual burden on the economy of “cap and trade”—the proposed mechanism allowing an industrial plant violating an emission standard to buy credits from another entity that is below the limit, such that the net effect between the two companies matches the standard—will be between $400 and $700 billion⁴, between 3% and 5% of GDP.  Furthermore, the proposals floating around Copenhagen obligate developed countries to offer reparations to developing countries to help the latter with any remediation resulting from climate change—essentially a new global tax on all products and services.

The solution is simple and within our reach, but evidently beyond the vision of governments.  In his testimony, Cristy further stated, “And, if the Congress deems it necessary to reduce CO₂ emissions, the single most effective way to do so by a small, but at least detectable, amount is through the massive implementation of a nuclear power program.  Other currently available alternatives simply cannot produce enough energy to be significantly noticed at a price and geographic scale that is affordable.”

Nuclear power produces no CO₂.  Yet, the United States produces only 19% of its power from nuclear energy as compared to France producing 86%⁵.  By contrast, the U.S. generates 49% of its electricity from coal⁶—the worst offender of GHG, whereas France produces only 4.1%.  What did the French do right?  Steve Kidd, Director of Strategy & Research at the World Nuclear Association, answers that question succinctly with two things lacking in the U.S.: a unified national energy policy and a standard power plant design that increases safety while cutting costs.⁷  It takes years to license and commission a plant in the U.S., each one with a unique design.⁸  The last plant to be brought on line in 1996 took 24 years to build.⁹  One plant, in Shoreham, Long Island, was built but never commissioned for political reasons.  Standard plant designs and streamlined licensing would alleviate these problems.

Perhaps the main objection to nuclear power is the management of spent fuel.  The severity of this is dubious when one considers that, according to the Nuclear Energy Institute, “Over the past four decades, the entire industry has produced about 60,000 metric tons of used nuclear fuel.  If used fuel assemblies were stacked end-to-end and side-by-side, this would cover a football field about seven yards deep.” ¹⁰

Reaching the same percentage of electricity production as France would cut 2.4 billion tons of CO₂ from our emissions, 129% of entire amount emitted by all of transportation.  It would reduce total CO₂ emissions by nearly 40%, without burdening our economy with new costs and regulations.

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[1] 2009 U.S. Greenhouse Gas Inventory Report, Environmental Protection Agency http://www.epa.gov/climatechange/emissions/downloads09/GHG2007-ES-508.pdf

[2] Christy, John R., University of Alabama in Huntsville. Written Testimony, House Ways and Means Committee, 25 Feb. 2009 http://waysandmeans.house.gov/media/pdf/111/ctest.pdf

[3] “Big Costs Are Hurdle to Climate Pact.”  The Wall Street Journal, 4 Dec. 2009 http://online.wsj.com/article/SB125988268007875549.html?utm_source=Newsletter&utm_medium=Email&utm_campaign=Heritage%2BHotsheet&mod=WSJ_hpp_MIDDLTopStories

[4] “The Economic Consequences of Waxman-Markey: An Analysis of the American Clean Energy and Security Act of 2009.” The Heritage Foundation, 6 Aug. 2009 http://www.heritage.org/Research/EnergyandEnvironment/cda0904.cfm?utm_source=Newsletter&utm_medium=Email&utm_campaign=Morning%2BBell

[5] Électricité de France, http://energy.edf.com/edf-fr-accueil/edf-and-power-generation/nuclear-power-122172.html

[6] “Coal Statistics.” World Coal Institute http://www.worldcoal.org/resources/coal-statistics/

[7] Kidd, Steve. “Nuclear in France - what did they get right?” Nuclear Engineering International 22 Jun. 2009 http://www.neimagazine.com/story.asp?storyCode=2053355

[8] “Licensing New Nuclear Power Plants.” Nuclear Energy Institute http://www.nei.org/keyissues/newnuclearplants/factsheets/licensingnewnuclearpowerplantspage2/

[9] “Nuclear Power: 12 percent of America’s Generating Capacity, 20 percent of the Electricity.” U.S. Energy Information Administration http://www.eia.doe.gov/cneaf/nuclear/page/analysis/nuclearpower.html

[10] “Nuclear Waste: Amounts and On-Site Storage” Nuclear Energy Institute http://www.nei.org/resourcesandstats/nuclear_statistics/nuclearwasteamountsandonsitestorage/?

In early 1961, the first year of President Kennedy’s administration, Time magazine reported, “More alarming to builders, who are accustomed to a recession pickup as cheaper mortgage money becomes available to home buyers, housing has stayed down.” ¹  Then, as now, the country was in ten month recession characterized by a housing decline. ²  Unemployment was 7%and the Federal debt 50% of GDP. 

According to economist Herbert Stein, the stock market fell sharply the following year. ³  To grow the economy, Kennedy first proposed raising government expenditures, but was blocked by Congress.  Ah, the good ol’ days!

Analyzing his options to boost the economy, Kennedy observed at the Economic Club of New York, December 1962, “In the past, this could be done in part by the increased use of credit and monetary tools, but our balance of payments situation today places limits on our use of those tools for expansion.

“It could also be done by increasing federal expenditures more rapidly than necessary, but such a course would soon demoralize both the government and our economy.  If government is to retain the confidence of the people, it must not spend more than can be justified on grounds of national need or spent with maximum efficiency.

“The final and best means of strengthening demand among consumers and business is to reduce the burden on private income and the deterrents to private initiative which are imposed by our present tax system … it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.”  ⁴

This powerful realization elucidated a fundamental truth of economics: give incentives to people and they work harder, save more, and invest wisely.  As a result, counter-intuitively, tax revenues increase.

The Kennedy tax cuts started with a reduction of business taxes and a relaxation of depreciation rules, because Kennedy recognized they “increase incentives and the availability of investment capital.”  The bulk of the cuts, passed in 1964 after his tragic death, were in personal rates.  Before the cuts, the marginal rate—the tax paid on the last dollar a person earns—could only be described as repressive.  The top rate was 91%.  The lowest rate, 20%, applied between $0 and only $2,000 (equivalent to $14,000 today).  The middle class paid between 30% and 60% of their income to Washington. ⁵

Kennedy reduced the top rate to 70% and all brackets received cuts between 16% and 43%.⁶  Although other factors contributed, GDP grew 4.8% per year on average from 1961 to 1970, up from an average 2.6% per year for the nine prior years 1952 - 1960.  What is more, the Federal debt dropped to 36% of GDP through 1970, even as we built up defenses for the Cold War and Vietnam, because, as Kennedy predicted, tax revenues paradoxically increased with lower marginal rates.

The recession that President Reagan inherited in 1981 was remarkably similar to that assumed by Kennedy: six months of recession in 1980 followed by 16 months when unemployment rose to 9.7% in 1982. ⁷  Reagan had the added problem of dealing with 13% inflation and an energy crisis.  While others before him were wearing sweaters, tuning down thermostats, and talking about rationing energy, Reagan, understanding the nature of free markets, simply lifted the 1973 price controls on oil within days of taking office, which had the propitious effect of increasing supply and ending the crisis.  With Reagan’s support, the Federal Reserve under Paul Volcker brought inflation to just 3% by 1982 by tightening the money supply.

The dramatic successful conclusions of these two crises allowed Reagan to turn his attention to growing the economy.  Like Kennedy, he cut the top marginal tax rate from 70% to 50% in 1981.  Unemployment dropped through 6% during the next four years and tax revenues doubled throughout the 1980’s ⁸ as did GDP. ⁹  In 1986, Reagan signed a tax simplification law that cut the top marginal rate again to 33% and created only four brackets, which continued the economic boom.

Analyzing the effects of the Reagan program 14 years later, the Joint Economic Committee (JEC) of Congress concluded, “High marginal tax rates discourage work effort, saving, and investment, and promote tax avoidance and tax evasion…. The economic benefits of ERTA [Economic Recovery Tax Act of 1981, the first round of Reagan tax cuts] were summarized by President Clinton's Council of Economic Advisers in 1994: ‘It is undeniable that the sharp reduction in taxes in the early 1980s was a strong impetus to economic growth.’ " ¹⁰

What about the objection that tax cuts benefit only the rich?  The JEC said, “The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988.”

In our present recession, unemployment is ironically where it was in 1983.  Since the Reagan years, the marginal rates have crept up to just under 40% under President Clinton, as the chart below shows¹¹, and down slightly to 35% under President Bush—still higher than the Reagan years.

In contrast to Kennedy and Reagan, President Obama and Congress are considering raising marginal rates and capital gains taxes, while toying with tax surcharges and other ways of taxation.  Like a pilot who is taught to push a stalling aircraft’s stick down when instinct tells him to pull it up, they should put faith in the Kennedy paradox.  May they find succor to push on the stick in the words of Patrick Henry, "I have but one lamp by which my feet are guided, and that is the lamp of experience. I know no way of judging of the future but by the past."

Also appears on the Examiner

___________

[1] “Business: Housing Troubles?” Time, 24 Feb. 1961 http://www.time.com/time/magazine/article/0,9171,828814,00.html

[2] “Business Cycle Expansions and Contractions”, The National Bureau of Economic Research, http://www.nber.org/cycles.html

[3] Stein, Herbert. “Why JFK Cut Taxes” The Wall Street Journal, 30 May 1996 http://www.msjc.edu/econ/jfk022502.htm

[4] Kennedy, John F.  “Address to the Economic Club of New York.” 14 December 1962 http://www.americanrhetoric.com/speeches/jfkeconomicclubaddress.html

[5] “U.S. Federal Individual Income Tax Rates History, 1913-2009.” Tax Foundation, http://www.taxfoundation.org/publications/show/151.html

[6] Robbins, Gary & Aldona. “Tax Policy & the 1960s: Another Look At the Kennedy Tax Cuts.” Institute for Policy Innovation, http://www.ipi.org/IPI%5CIPIPublications.nsf/PublicationLookupFullTextPDF/D363A0E54E2E40AB862567ED00213FCA/$File/kennedy.pdf?OpenElement

[7] “Employment status of the civilian noninstitutional population, 1940 to date”, Bureau of Labor Statistics, ftp://ftp.bls.gov/pub/special.requests/lf/aat1.txt

[8] “Tax Revenues Nearly Doubled During 1980s.” The Heritage Foundation http://www.heritage.org/Research/Taxes/images/bg1086c10.gif

[9] “Real Gross Domestic Product, Chained Dollars”  Bureau of Economic Analysis http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=6&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1980&LastYear=1999&3Place=N&Update=Update&JavaBox=no#Mid

[10] “The Reagan Tax Cuts: Lessons for Tax Reform.” Joint Economic Committee, Congress of the United States, April 1996, http://www.house.gov/jec/fiscal/tx-grwth/reagtxct/reagtxct.htm

[11] “Maximum Income Tax Rates.” The Heritage Foundation http://www.heritage.org/Research/Taxes/images/bg1086c2.gif

The National Center for Policy Analysis (NCPA) observes, “The 2009 Social Security and Medicare Trustees Reports show the combined unfunded liability of these two programs has reached nearly $107 trillion in today's dollars!  That is about seven times the size of the U.S. economy and 10 times the size of the outstanding national debt.” ²  It is also twice the aggregate wealth of all American households. 

Economist Bruce Bartlett analyzed both the Social Security and Medicare reports for 2010 and discovered that the unfunded liabilities would require a tax increase of 81% in perpetuity. ³  Clearly, something must change structurally in the way we finance the safety net on which so many rely.   This system was workable when the public debt was 30% of GDP only 20 years ago, but is perilous when the debt is nearing 100% of GDP today.

Wishful thinking and illusion are not limited to stealth and complex government programs.   While Treasury Secretary Geithner was in Tokyo last week he affirmed the importance of a strong dollar. ⁴   A free floating currency exchange reflects the relative economic policies of the host countries and the relative demand for the goods they produce.   For the Treasury Secretary to "talk the dollar up" is as effective as a drug dealer proselytizing the junkie to drop his addiction.

" ‘Given the role of the dollar, frankly, there's not a tremendous amount one can do other than try to run a good, sound policy and restore the U.S. economy to growth,’ [World Bank President Robert] Zoellick told a panel discussion on the sidelines of the Asia-Pacific Economic Cooperation forum annual summit.” ⁵   And that is precisely what we have not been doing for many years.

What is worse, we have been flooding the market with cheap dollars in order to stimulate our economy, discomfiting Asian countries by a new impending bubble.   Even the communist Chinese saw fit to lecture capitalist Americans: “Liu Mingkang, chairman of the China Banking Regulatory Commission, said that a weak U.S. dollar and low U.S. interest rates had led to ‘massive speculation’ that was inflating asset bubbles around the world.”⁶   Have the Chinese become reformed monetarists?  Not quite.  They still insist on pegging the renminbi to the dollar while they complain.  This has three effects: 1) U.S. exporters cannot benefit from a lower dollar to sell more goods to China, 2) U.S. consumers push more dollars to China in return for artificially low prices on imported goods, and 3) other countries, particularly those in Southeast Asia, are similarly hurt by the artificial exchange rate because their currencies look high in relation to the yuan.   By any definition, this is not  free trade. 

Thus, our trade deficit actually grew in September with the lower dollar ⁷—just the opposite effect one would expect—because our appetite for foreign cars and foreign oil cannot be sated, and government won’t allow an otherwise normal exchange rate to attenuate it.   The administration’s response is to favor protectionist measures rather than to address the underlying economic conditions, potentially resulting in double trouble.

Another bit of hocus-pocus last week was the Obama administration’s plan to use TARP money to reduce the deficit:  “The administration wants to keep some of the unspent funds available for emergencies, but is considering setting aside a chunk for debt reduction.” ⁸  TARP—troubled asset relief program—was supposed to have relieved banks from the synthetic securities they designed that ultimately had no market.  Bailing these banks out was a questionable government activity to begin with, but Congress and two administrations have treated TARP like a floating fund, using it for anything but troubled assets, and arguably violating TARP’s foundational authorization that was passed over the will of the people.   Inasmuch as TARP originally added to the Federal deficit, not spending a portion would not reduce the deficit, but would merely not increase it.  There is no “setting aside” because TARP is one of those stealth programs—just an accounting entry.  This inconvenient truth does not dissuade the administration from creating the illusion that it is doing us a favor.

__________

[1] Webb, Roy H. “Economic Review: The Stealth Budget: Unfunded Liabilities of the Federal Government.” Federal Reserve Bank of Richmond,May/Jun1991 http://www.richmondfed.org/publications/research/economic_review/1991/pdf/er770303.pdf

[2] “Social Security and Medicare Projections: 2009”.  National Center for Policy Analysis, 11 June 2009, http://www.ncpa.org/pub/ba662

[3] Bartlett, Bruce. “The 81% Tax Increase.”  Forbes, 15 May 2009 http://www.forbes.com/2009/05/14/taxes-social-security-opinions-columnists-medicare.html

[4] “Geithner Affirms Strong Dollar Policy.” The Wall Street Journal, 11 Nov. 2009, http://online.wsj.com/article/SB125792362908743307.html?mod=WSJ_hpp_LEFTTopStories

[5] “Bubble Fears Surface at APEC Gathering.” ibid., 14 Nov. 2009 http://online.wsj.com/article/SB125812846361947215.html

[6] “China's Blunt Talk for Obama.”  ibid., 16 Nov.2009 http://online.wsj.com/article/SB125826103009548975.html?mod=article-outset-box

[7] “Sinking Dollar Aids Exports, but Trade Gap Grows.” ibid., 14 Nov. 2009 http://online.wsj.com/article/SB125811859626047087.html?mod=WSJ_hps_LEFTWhatsNews

[8] “White House Aims to Cut Deficit With TARP Cash.” ibid., 12 Nov. 2009 http://online.wsj.com/article/SB125799009185344567.html?mod=WSJ_hpp_MIDDLENexttoWhatsNewsSecond

As Ludwig von Mises would remind us, economics is human action. Twenty years ago today, human action vanquished oppression as the Berlin Wall fell and communism began to fall with it.

To celebrate the incredible event that many thought would never happen, I picked up William F. Buckley, Jr.’s The Fall of the Berlin Wall, who writes about the following events.

Economic and political freedoms are inextricably linked, as Margaret Thatcher pronounced in Poland in 1988, one year before the opening of the totalitarian eastern bloc countries to the West. The struggle between the communist East and the post World War II free West was as much about economic well-being as it was about personal freedom.

It was a struggle that goes back to when Stalin violated the agreements of Yalta and Potsdam by blockading Berlin in 1948. The United States, under President Truman, responded with a courageous airlift. Although the effort was successful, the seeds of repression in East Germany had been sown under the emboldened de facto head, Walter Ulbricht, who, among other things, saw fit to dictate industrial policy.

As the Soviet Union under Khrushchev became more territorial, the US did not know how to react at first. Both President Kennedy and Senator William Fulbright, perhaps unwittingly, conceded the division of Berlin before it happened. Kennedy later realized his errors and the import of Soviet hegemony when in 1963 he gave his rousing “Ich bin ein Berliner” speech:

“There are many people in the world who really don't understand, or say they don't, what is the great issue between the free world and the Communist world. Let them come to Berlin. There are some who say that Communism is the wave of the future. Let them come to Berlin. And there are some who say in Europe and elsewhere we can work with the Communists. Let them come to Berlin. And there are even a few who say that it is true that Communism is an evil system, but it permits us to make economic progress. … Let them come to Berlin.

“Freedom has many difficulties and democracy is not perfect, but we have never had to put a wall up to keep our people in, to prevent them from leaving us."

The heroic escapes by East Germans as Ulbricht was constructing his Wall attested to Kennedy’s keen observation that it was designed only to keep people in … and oppressed. The inventiveness and resolve of individuals seeking liberty for themselves and their families are remarkable tributes to man’s mind and will. But it is man’s sacrificing his own life to help his countrymen attain freedom, as many did, that sings the triumph of the soul.

Scarcity of goods in the East was well known. The Soviet invasion of Czechoslovakia in 1968 only amplified the failures of socialism throughout the communist bloc.

It was ten years later that private citizen Ronald Reagan decided during a visit to Berlin that the Wall must come down. In 1982, as President, he took a few steps over the border at Checkpoint Charlie in what was to become the daring prelude to the daring in his challenge:

“General Secretary Gorbachev, if you seek peace, if you seek prosperity for the Soviet Union and Eastern Europe, if you seek liberalization: Come here to this gate! Mr. Gorbachev, open this gate! Mr. Gorbachev, tear down this wall."

This could not have been possible, however, without Reagan’s recognizing the economic fissures inside the Soviet Union and his policy of pressuring the underlying forces throughout his Presidency. Up to that point, the U.S. had depended upon a precarious combination of external resistance and negotiation.

And it would not have been possible without Pope John Paul II and the Catholic Church’s stout opposition to totalitarianism as a violation of human dignity; first by the Church’s opposition to censorship in Poland, and by the Pope’s support of free trade unions in his Polish homeland. Gorbachev respectfully said about the fall of communism, "It would have been impossible without the Pope."

Nobel economist Milton Friedman observed the fall of the Berlin Wall with this warning: “The formerly totalitarian societies have developed institutions, public attitudes, and vested interests that are wholly antithetical to the rapid creation of the basic economic requisites for freedom and prosperity.” He continued with advice for both the newly freed East and the bloated West: “Countries seeking to imitate the success of the West will make a great mistake if they pattern their policies on the current situation in the West. … Only our attained wealth enables us to support such wasteful, overblown government sectors.”

The current situation in the West, twenty years after freedom burst through the man-made barrier of socialism, obliges us to ask: do we have the resolve today to rebuild the political and economic framework that would preserve and sustain freedom around the world?

After last year’s impressive win by Barack Obama, I wrote an article, “What the Republican Party must do now” in which I proffered the notion that it must return to conservative principles, in a principled manner.

Yesterday’s results are meaningful for two reasons, but not because Republicans won two state gubernatorial elections.  We still don’t know what Chris Christie believes and what he will do.  Rather, the results show that voters a) quickly tire with the false promise of omnipotent and benevolent government, no matter how they are temporarily seduced into trading their freedom for illusory protection; b) seek a return to wholesome family values, as demonstrated by Maine’s vote to overturn gay marriage laws.  60% of States now have rejected such unholy unions.

“Conservatism is too important to be left to the Republican Party”, says Richard Morris.  Unless a putative conservative party can recreate 50 state recruiting and funding machines, the Party is conservatives’ only hope.

One day after the swearing in ceremonies in New Jersey and Virginia the distinction between the two parties will blur again into torpor unless the GOP seizes this new opportunity. 

Now is the time to sharpen differences and shore up the foundation of liberty and capitalism.  Now is the time to become an incandescent beacon for the majority of Americans who seek refuge from cultural decadence and government enforced dissolution of the inalienable relationship between man and his Creator.  Now is the time to be stalwart in demanding of those we elect the highest standards of ethics and behavior expected of humble representatives and employees of the people.

In the prior article, I outlined nine policy recommendations derived from core conservative principles.  Here are post 2009 pre-2010 election refinements:

1. Smaller government: total public debt is rapidly approaching 100% of GDP, putting us in the class with banana republics.  This is the basis of an argument that is not only financial, but one that must be expostulated for the preservation of liberty; for individual freedom is inversely proportional to the size of government. 
2. An end to taxation of capital and the burdening of its productive use; otherwise we will surely have less of both.  There is, too, a seething discontent with incremental taxation at local and state levels on every sort of daily life from property taxes to usage fees on electricity, heat, telephone, and television, to surcharges on mass transportation, small business, and freelance work.  To become a party with nationwide appeal, national conservative voices must be raised against local threats to freedom. 
3. Fastidious respect for our Constitution and the beliefs on which it is written. We might start with limiting the power of the Executive by recalling all “czars” until they are confirmed by the Senate.
4. Free trade and fair trade: it is time to impose strict product quality compliance on Chinese imports, to give most favored nation status only to countries who agree to float their currency against the dollar, and to make the United States’ tax and regulation codes business-friendly to attract investment.
5. A stable and predictable monetary system.  The Fed’s power should be clipped such that it  can only protect against inflation or depression.  It should not be given regulatory responsibility as it does not report to any branch of government.  And permitting it to chase interest rates is giving too much power to too few.
6. Minimalist government intervention in the economy: an end to the “too-big-to-fail” fallacy, a repudiation of TARP and economic “stimulus”, and government’s divestiture of all private enterprise including AIG, GM, bank warrants, and Freddie and Fannie.
7. A strong national defense—and that must, now more than ever, start at the borders of the United States.
8. A respect for all life.  As President Reagan said, “Abortion is either the taking of a human life or it isn't.  And if it is—and medical technology is increasingly showing it is—it must be stopped.”
9. Zero tolerance for abuse of power.  It is time, again, to revisit term limits, or at least to end all corporate lobbying and campaign contributions—sources of fraud and corruption. Corporations are not people and should not be afforded the rights of an individual citizen.

This is the time for audacity, for courage, and clarity.  This is no time for diffidence, for moderation, nor ambiguity.

• Consumer spending turned up strongly. Spending on new cars and trucks was a big contributor, reflecting the federal “cash for clunkers” program, which was in effect in July and August.
• Housing increased for the first time in 15 quarters.
• Inventory investment, exports, and government spending also added to growth.¹

The BEA estimates that “motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP” ²; that is, almost half of the increase.  When the government throws money at consumers, the GDP is boosted two ways by the definition: in this case 0.48% for government spending and 2.36% for personal consumption (including the 1.66% of vehicles) for a total effect of 2.84%.  The balance of the 3.5% GDP increase comprised investments, +1.22%, and net exports, -0.53% (imports exceeded exports, and the net reduced GDP).

The hypothesis that government incentive drove consumption in Q3 was confirmed by the data released a few days after the GDP announcement showing consumption declined 0.5% in September.  The Wall Street Journal reported, “The decline was largely attributed to reduced car sales a month after the ‘cash for clunkers’ program ended.  Spending on durable goods such as cars and other products designed to last more than three years fell 7%, more than erasing gains from a month earlier.” ³

Was the transitory cash for clunkers program worthwhile?  According to the Department of Transportation, the government spent almost $3 billion to help 690,000 consumers trade old vehicles for new ⁴.  The average increase in miles per gallon was 9.2.  Using the DoT’s numbers, on average we spent $4,170 per vehicle in order to help the owner save 278 gallons per year⁵ or, at $2.80/gallon, $778.  In aggregate we are saving 191.8 million gallons of fuel per year.  Sounds like a lot?  The U.S. consumes 378 million gallons per day⁶, which means that all these gymnastics save only half a day’s fuel annually.

Did the program help put a dent in oil imports?  Again the answer is ‘no’.  We import roughly 13 million barrels of oil per day ⁷.  At $80 dollars a barrel, we send about $1 billion overseas daily.  Those 191.8 million annual gallons saved by the clunkers exchange are equivalent to roughly 12,515 barrels per day ⁸ which equates to $1 million/day. This is a trifling one thousandth (1/1000) of our daily imports.  Put another way, these vehicle fuel savings will take eight years to cover the government’s borrowing $3 billion for the program ⁹.  And that does not include interest our children will pay on that debt.

Have we helped the automakers?  Again, according to the DOT statistics, ten of the top ten vehicles traded-in were American.  Of the top ten new vehicles bought, eight were foreign.  Music and dancing were heard on the streets of Tokyo and Seoul.

Secretary of Transportation Ray LaHood called the program a “win for the environment”, but is it?  According to the government’s web site, we emit 17 billion tons of greenhouse gases each year from our vehicles ¹⁰.  The fuel saved from the clunkers programs will save a nugatory 1.9 million tons/year: about one ten-thousandth (1/10,000) of the nationwide emissions ¹¹.

With the these indefeasible facts, one has to look at The White House paean to the 640,329 jobs “created/saved”—miraculously up from only 30,383 just a few days ago on Recovery.gov—with economist Alan Meltzer's skepticism, “One can search economic textbooks forever without finding a concept called ‘jobs saved’.“ ¹²

Evidently, there are a few other things one cannot find in those books.

________________

[1] GDP Rises 3.5 Percent In Third Quarter, “Advance” Estimate of GDP, Bureau of Economic Analysis http://www.bea.gov/newsreleases/national/gdp/2009/pdf/gdp3q09_adv_fax.pdf

[2] Gross Domestic Product: Third Quarter 2009 (Advance Estimate), Bureau of Economic Analysis
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

[3] Consumer Spending Falls, Fueling Concerns About Recovery , 31 Oct. 2009, The Wall Street Journal, http://online.wsj.com/article/SB125690429096718435.html

[4] US Department of Transportation: http://www.dot.gov/affairs/2009/dot13309.htm

[5] a) $2,878M/690,114 vehicles = $4,170
b) Assuming 12,000 average miles driven/year/vehicle:
12,000/24.9 MPG (new vehicle) – 12,000/15.8 MPG (traded vehicle) = 278 gallons/vehicle

[6] Energy Information Administration: http://tonto.eia.doe.gov/energyexplained/index.cfm?page=oil_home#tab2

[7] Energy Information Administration: http://tonto.eia.doe.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbblpd_a.htm

[8] Using a DOE factor of 42 gallons/barrel of oil: (191.8 million gallons/year) / (42 gallons/barrel) / (365 days/year) = 12,511 barrels/day

[9] $3 B / ($1 M x 365 days/year) = 8 years

[10] FuelEconomy.gov, http://www.fueleconomy.gov/feg/climate.shtml

[11] 191.8 million gallons saved/year x 19.4 pounds of CO2 emitted/gallon / 2000 lbs./ton = 1.86 million tons

The low dollar and high deficits are cognate for two reasons.  First, the Fed had to print money to increase liquidity in answer to credit markets drying up; a policy that has failed, incidentally, because, as any small business or home buyer will tell us, credit is still tight.  The central bank also has to print money to finance the national debt.  The resulting oversupply of dollars devalues the currency.

Second, as overseas investors weigh the risk of investing in the U.S. against other countries, they prefer to place bets in lower risk, higher return markets.  Part of that risk calculus is the cost of doing business in this country—wages, taxes, insurance, property taxes—and part comes from political and fiscal risk.  When the U.S. runs high debt, investors are leery of future taxes and fees to service the debt.  Thus money—and jobs—flow away from the US, putting downward pressure on the dollar.  The combination of a low dollar and high money supply eventually fuels inflation.  A sound fiscal policy, prudent control of debt, and a business-friendly environment will be reflected, therefore, in a stronger dollar while tempering the risk of inflation.

In an Op-Ed piece in The Wall Street Journal, economist Judy Shelton observed “the projected federal debt will continue to equal or exceed our nation's entire annual economic output through 2019 … The U.S. is thus slated to enter the ranks of those countries—Zimbabwe, Japan, Lebanon, Singapore, Jamaica, Italy—with the highest government debt-to-GDP ratio”.  Zimbabwe?  And if the US were a European country, it would be denied membership into the European Union because “countries wishing to adopt the euro must first limit government debt to 60% of GDP” ¹.

David Wessel observed in the Journal that we have overcome these problems before although, “When the economy began climbing out of the deep recession of the early 1980s, federal debt -- the sum of every annual budget deficit* -- amounted to less than 30% of the nation's GDP”².  With debt now at 90% of GDP, we in much deeper this time.

The Financial Times reported “The US budget deficit hit a record $1,400bn in the last fiscal year as the government tried to spend its way out of recession, slightly less than expected but still more than three times that of 2008.”  This one year deficit, fully 10% of GDP, is a result of “Government spending [rising] 18.2 per cent from 2008, in part because of Tarp and the $787bn fiscal stimulus package.”³

So how is that stimulus working out for us?  According to the government’s web site, Recovery.gov, we have created—get ready—a grand total of 30,383 jobs⁴.  With less than two-tenths of 1% of the 15 million unemployed in this country allegedly getting jobs through the “stimulus” the administration insists the program is a success.  "Thanks largely to the Recovery Act, alongside an aggressive financial stabilization plan and a program to keep responsible homeowners in their homes, we have walked a substantial distance back from the economic abyss and are on the path toward economic recovery," wrote Larry Summers⁵.

Substantial?  Recovery.gov, reports only $2 billion of the stimulus has been distributed in contracts. This amounts to roughly $66,000 spent for each of those jobs created.  Further, the site reports “jobs saved/created” ranges from 5.93 in Rhode Island to 4693.05 in Colorado.  It is unclear how The White House thinks it “saved” a job let alone measuring salvation with accuracy to the second decimal.

Against this backdrop of run away deficits, the Senate Finance Committe passed one of the largest tax increases in history under the guise of “health care reform” at a cost of over $829 billion.  In a canard, the Congressional Budget Office claims the bill, which no one has seen because Congress refuses to post it in this age of transparent government, will not increase the deficit; but the CBO's estimate is based on fuzzy accounting replete with unsubstantiated assumptions.  Move aside Zimbabwe and Jamaica, Congress just can't say "no".

Sen. Olympia Snowe of Maine, the sole Republican to vote for the bill, said she wanted to be part of history.  She did not elaborate whether she was thinking about the Hindenburg or the Titanic.

__________

*  [less payments made, plus accumulated unpaid interest – MA]

__________

[1] “The Message of Dollar Disdain”, 13 Oct. 2009, The Wall Street Journal, http://online.wsj.com/article/SB10001424052748704107204574470961505506386.html

[2] “Deficit Dilemma: How to Dig Out?” 15 Oct. 2009, The Wall Street Journal, http://online.wsj.com/article/SB125554787267585505.html

[3] “US budget deficit hit a record $1,400bn”, 17 Oct. 2009, Financial Times, http://www.ft.com/cms/s/0/92624ee8-baa2-11de-9dd7-00144feab49a.html

[4] Recovery.gov: Track the Money, http://www.recovery.gov/Pages/home.aspx

[5]  “Summers to GOP's Boehner: Recovery Act Is Working”, 12 Oct. 2009, The Wall Street Journal, http://online.wsj.com/article/SB125534918141780117.html

_____________

[1] “Sarkozy hands business €10bn tax cut”, 29 Sep. 2009, Financial Times, http://www.ft.com/cms/s/0/4c0da02a-ad0d-11de-9caf-00144feabdc0.html

[2] “Cruel September for Car Makers” 2 October 2009, The Wall Street Journal, http://online.wsj.com/article/SB125440186148556087.html

[3] McCullagh, Declan. “Chrysler Bankruptcy Exposes Dirty Politics”, 7 May 2009, CBS News, http://www.cbsnews.com/stories/2009/05/07/politics/otherpeoplesmoney/main4997900.shtml

[4]”Bank of America Chief Resigns Under Fire”, 2 Oct. 2009, The Wall Street Journal, http://online.wsj.com/article/SB125434715693053835.html

[5] UPI, http://www.upi.com/Real-Estate/2009/09/25/Freddie-Macs-Delinquent-Loans-Rise-for-28th-Month/4731253892039/

[6] “Subprime Uncle Sam”, 29 Sep. 2009, The Wall Street Journal, http://online.wsj.com/article/SB10001424052970204488304574428970233151130.html

[7] “World Bank Head Sees Dollar’s Role Diminishing”, 28 Sep. 2009, The New York Times, http://www.nytimes.com/2009/09/29/business/economy/29dollar.html

The amendment failed in Committee 15-8 and the public option seems to be dead in the Senate version of the health care reform bill.  But why let Smith-ideation go down with it?  The Democrat from West Virginia may be on to something. 

Certainly Adam Smith would not have “cooked up” any such thing as a public option.  The Heritage Foundation observes that Smith wrote, “The policy of Europe [for government chartered corporations] occasions a very important inequality in the whole of the advantages and disadvantages of the different employments of labour and stock, by restraining the competition in some employments to a smaller number than might otherwise be disposed to enter into them.” [2]

If Smith lamented a “smaller number than might otherwise be disposed” of competitors resulting from government meddling in private business, we might deduce his support for some greater number of competitors that a completely free market would dispose.  And that is precisely the idea that Republicans—perhaps now with Adam Smith’s newest fan, Rockefeller—should advance.   

Surprisingly—or perhaps not surprisingly, depending on your level of cynicism about Congress—nothing in the plans proposed by either chamber embrace free market solutions.  Each one seeks to increase demand for services by forcing the uninsured and poor into a health care system that is already stressed.  No proposal addresses cost stabilization by market competition in either the health insurance or health care markets.  What will happen, then, when 30 to 46 million new participants (depending on how one accounts for illegal immigrants) are given by largesse or start to buy services from a doctor population that now serves one in every 416 person as compared to one to 300 for France, Germany, Sweden, and Australia? [3]

No proposal addresses the 50 state-wide oligopolies that characterize the current health insurance market.  In 2006, The New York Times wrote, “The Government Accountability Office, an investigative arm of Congress, said that the largest insurer had 43 percent of the market for small group coverage in a typical state, up from 33 percent in 2002.  In nine states, the largest carrier — a Blue Cross and Blue Shield company — has more than 50 percent.” [4]  It sounds like state governments have already treaded where Federal government wishes to go, with the result of fulfilling Smith’s prediction. 

No proposal gives incentive to individuals and small businesses to buy insurance.  Rather, they impose an array of penalties and tax manipulations that add unnecessary complexity as they empower the IRS to enforce the reduction in individual freedom under threat of additional penalties and even incarceration.  Besides the lack of choice in insurance, the problem is a form of corporate welfare represented by the tax deduction given employers to buy insurance on behalf of their captive members.  In effect, those who do not work for large corporations are subsidizing those who do.  A Kaufman-RAND study found, “… between 2000 and 2005, the economic burden of providing insurance increased for employers, particularly for the smallest firms.” [5]  Why not, therefore, give the tax incentive directly to individuals and allow them to buy insurance from any provider, anywhere in the country.  Opening the playing field while leveling it allows markets to work efficiently. 

Finally, with the public option defeated, at least in Committee, where do we leave the poor?  No great nation can turn its back on the less fortunate and claim greatness.  Economist Arthur Laffer suggests we offer the poor vouchers for medical insurance that they may trade on the same open market (if we can open it) accessible to the rest of us, preferably through Health Savings Accounts. [6]

[1] Klein, Philip. "Rockefeller: Adam Smith Would Have Supported Government-run Health Care", American Spectator, 29 Sep. 2009,  http://spectator.org/blog/2009/09/29/rockefeller-adam-smith-would-h 

[2] The Heritage Foundation, 30 Sep. 2009, Would Adam Smith Support Government-Run Health Care? http://blog.heritage.org/2009/09/30/would-adam-smith-support-government-run-healthcare/

[3]OECD Health Data 2009, http://www.oecd.org/document/30/0,3343,en_2649_34631_12968734_1_1_1_37407,00.html

[4] Pear, Robert. "Loss of Competition Is Seen in Health Insurance Industry", The New York Times, 30 April 2006, http://www.nytimes.com/2006/04/30/us/30insure.html

[5] Kauffman-RAND Institute For Entrepreneurship Public Policy, 2008  http://rand.org/pubs/technical_reports/2008/RAND_TR559.pdf

This innocuous statement seems to contradict other parts of the agreement that commit to free market principles: to “phase out inefficient fossil fuel subsidies”, “promote energy market transparency”, and “fight protectionism … toward a successful conclusion” of the Doha Round of trade liberalization talks.

Yet, contradictions abound.  Buried in the G-20 final communiqué are cryptic notions of “shared objectives”, “rebalancing” of growth, and “collective implications” with “mutual assessment” of national policies.  What all this means might be inferred from a letter that White House senior aide Michael Froman wrote to his G20 counterparts two weeks before the meeting2, "As private and public saving rises, the world will face lower growth unless other G-20 countries undertake policies that support a shift towards greater domestic, demand-led growth."   The administration seems to be exporting their apparent distaste for capital formation—the by-product of savings and investment—as the catalyst of economic growth.   It is one matter to keep these notions within the borders of one’s country; it is quite another to plead them as universal truths.

Two disquieting premises emerge from this faith in 20 governments’ ability to do collectively that which has eluded any single country.  First, in this concept of rebalancing lies the assumption that governments actually exercise control over their economic activity. Elsewhere in the communiqué the members reveal their exasperation that the contrary is true.  The best they could do, for example, to address future bubbles was to debate without conclusion the effect of bank capital, derivatives markets, and employee bonuses as contributing factors of crises.  Are such microeconomic concerns governments’ best tools to prevent overexposure to risk in a financial system, what they refer to in the communiqué as macro-prudential policy?  They seem, instead, to be admitting ignorance of the causes of the present crisis or impotence in preventing the next one. No mention was made of monetary policy or how the risk exposure of quasi-governmental agencies, like Freddie and Fannie, distort prudent decision making in the private sector.

The second troubling presupposition in the G20 Framework is that governments have the capability to share economic management as a group and then subject it to peer review.  Without having established the first premise, the second is obviously false.  Imagine Communist China, where the savings rate is as high as 40% and industry subsidized, assessing or being assessed by the United States where markets are freer but which only recently emerged from a negative savings rate and continually runs huge budget and trade deficits largely financed by China.  After the meeting, both China and the U.S. acknowledged the difficulty3.

In the late 50’s and early 60’s Robert Welch, head of the John Birch Society, posed a threat to the advance of the nascent conservative movement by his malevolent speculation about the motives of those whom he considered enemies of the state, including the Eisenhower administration.  Left unchecked, Welch's eruptions might have aborted Barry Goldwater’s nomination for the Presidency.  Welch claimed Eisenhower was a “conscious, dedicated agent of the Communist conspiracy”1.  Welch’s censure had to come from conservatives themselves if conservatism were to have grown by attracting thinking men and women.  With Goldwater’s blessing, William F. Buckley, Jr., in the National Review, exposed what he called the Birch fallacy: 

“The fallacy,” [Buckley said], “is the assumption that you can infer subjective intention from objective consequence: we lost China to the Communists, therefore the President of the United States and the Secretary of State wished China to go to the Communists.” 

Buckley called Welch’s views “far removed from common sense”, and Goldwater called for his resignation in characteristically deadly accurate words: “We cannot allow the emblem of irresponsibility to attach to the conservative banner.” 

Today, we have votaries on both the left and right displaying that same kind of divergence from common sense.   

On the right, if Party leaders leave unanswered the reprehensible parallels drawn between the President and 20^th century dictators, their political stature and moral authority to advance constructive proposals that should be rooted only in impeccable conservative logic will erode.  This principle should have motivated Republican leaders to distance the Party from Rep. Wilson’s disrespect of the President and his Office in a joint session of Congress, before the opposition could seize an opportunistic and transparently political moment to reprimand the Congressman.  To his credit, Sen. McCain took that hill, but when he turned around the troops were hiding in the trenches.  On these grounds of principled leadership, the Party should be all too eager to renounce those who express their passions without civility or in exaggerated tones.  Character in politics is doing the right thing when you are almost assured it will bring the scorn of your allies. 

On the left, Jimmy Carter made the case this week that there should be a law protecting the people from gross negligence by a former President.  Carter, who in lieu of leadership in the 70’s answered the misery index—the aggregate of high inflation and interest rates—with a somber and depressing lecture on American “malaise”, was never known for his ability to lift the country to the high ground.  But to be out front accosting sincere critics of the President and those who genuinely dissent  from his policies with "racism" is to display an ignominy akin to those on the right who liken Obama to evil statists.  Equally unfathomable is the pied-piper response from those in Carter’s Party who, in their hypnotic trance at the thought that he may have discovered the magic key that gives them license to ram any bill past the will of the people, expose their supine aversion to moral leadership.  Will the Party of Kennedy, Johnson, and King quench or fan the flames of bigotry? 

In a strange twist of history, Carter and his adherents are guilty of the Birch fallacy: the right opposes big government led by a black man; therefore the right must be racist.  The loud, but thankfully numerically insignificant, neo-Welchs claiming to be conservative are also committing that fallacy: Obama is centralizing economic power, therefore Obama is a closet dictator. 

Both are, in the words of Goldwater, irresponsible.  The corollary is that those first to call for civil, respectful discourse will lead their party and the country to what President Reagan, who vanquished malaise, called “morning in America".

_______________________

1- Buckley, Jr, William F. (March 2008). "Goldwater, the John Birch Society, and Me". Commentary.

Had he stopped after five minutes, we all would have signed up.  His eloquence was in top form for at least that long in his health care speech to Congress, even if he precipitated credit to his own policy for pulling our economy from the brink.  Who needs the Fed anyway?  Ignoring that minor self-adulation, the President correctly postulated [1]: 

- We are the only advanced nation that tolerates the loss of insurance and hardship of individual medical expenditures;

- Insurance prices rise too rapidly [true, in comparison to GDP or real wages];

-  If  “… you move, lose your job or change your job, you’ll lose your health insurance too”.

- “We spend one and a half times more per person on health care than any other country”  [actually, it is closer to two times as much];

- “Our health care system is placing an unsustainable burden on taxpayers [because it raises Medicare and Medicaid costs] …”

Now, if we would give this problem to an Economics 101 class, they might conclude (if Paul Krugman is not teaching the course) that demand must be outpacing supply in both the insurance and health care markets, that both markets may be non-competitive, or that the underlying costs of insurance and health care drive prices too high. 

They might come up with a system that conduces more competition in order to balance supply and demand, increases production and encourages greater choice to put downward pressure on prices, and minimizes all direct and indirect government contribution to structural costs issuing from regulation or institutionalized waste and fraud. 

Instead, the President proposed:

- No change in employer-provided health insurance; in other words, for 85% of Americans who have insurance and for their employers, the President’s plan offers no relief.  The practice of welfare for corporations in the form of the medical insurance tax deduction will prevail and continue to spread cost escalations throughout our economy.  Employers will still be permitted to pick their employee’s health insurance carrier instead of us allowing consumers to choose in an open market.  Carriers may continue to nominate “in-network” providers, thus maintaining a lid on supply.  There will be no competitive pressure to lower price or to reduce the component costs of health care.  And we certainly will not upset the munificent benefits unions negotiated—you know, the kind that forced GM to become part of the country’s investment portfolio.

-  For remaining the 15% who have no insurance [2] or for the entrepreneur starting a business, the President offers a “marketplace” of insurance products, although, curiously, not for another four years.  This may sound like a fillip, though there is nothing novel here.  As long as the present market remains oligopolistic, that is, as long as the number of insurance carriers is limited and inter-state contracts proscribed by states, simply selling insurance on the Internet cannot introduce efficiencies.  If those restrictions were lifted, private enterprise would create the necessary exchanges just as it has in other industries if left free by the government, provided the marketplace is open to all insurance companies and all insurance seekers, including the 85% whose sub-efficient, high cost plans are protected under the President’s proposal.  Although Obama sang a paean to ‘competition’, Senior Advisor David Axelrod later clarified the administration will do nothing to open the 50 state-regulated insurance markets.

- What is most odious about this plan, particularly the version in Senator Max Baucus’ Finance committee, who according to some should not be leading this effort because of his ties to insurers and pharmaceutical companies [3], is the maze of penalties and subsidies designed to direct consumer and small business behavior [4].  Behavior modification through economic policy comes with a heavy price: the invidious loss of freedom.  Obama and Baucus intend to oblige small companies and the “irresponsible” self-insuring young to purchase insurance … which insurance can only be government approved … which purchase will be subsidized with tax credits … which subsidies will be financed with surcharges on insurance companies and penalties on non-participating companies (take that you entrepreneurs) … which surcharges and penalties are to be defined by Congress … which … 

Only the left thinks in such convulsions. 

While Obama and the Democrats identified the problem correctly, and should be credited with focusing national attention on it, they are building their solution on the vaporous fantasy that government can direct human action with tax policy, penalty, and fiat.   

Their plan increases demand on insurance and health care by forcing 30 million new consumers into the system, but does nothing to increase supply.  It addresses less than one-fifth of the population, and ignores the structural costs driven throughout the system by the existing coverage of the other four-fifths.  It turns a blind eye to the absence of competitive forces that could otherwise fundamentally improve efficiency and lower costs in both markets.  And it expands government at the expense of our freedoms.