Fiscal Cliff? Not Really - But Republicans are on the Defensive

I watched Brit Hume on O'Reilly tonight and had to agree with his simple analysis of the so called fiscal cliff situation.  Obama is showing his native arrogance because he correctly assesses that he has the advantage in these negotiations.  Two bad things will happen that Republicans don't like, tax rates will increase and defense spending will be cut.  Only one thing will happen that Democrats don't like, Medicare will be cut, and Republicans will take the blame for it.  Further, the public is set to blame Republicans right now, because they can't get their act together on messaging.  Hume blames the MSM, but I think its time to quit doing that.  The MSM is an arm of the left, just get used to it; point it out occasionally, but deal with it.

What's to be done?  Boehner truly has a weak hand, he has to keep his members in line, and they are always worried about the next election.  My strategy would be to stall.  Keep passing short little extensions of the status quo and kicking the can down the road a bit.  Use the time to get the messaging better and trumpet what you are willing to do.  For example, phasing out deductions for the rich will raise revenue in a static analysis.  It eventually needs to be done in order to keep marginal rates low anyway.  So the Republicans need to tout how they are reformers of the status quo and are also putting revenu on the table.  If only, if only, the President would do something about spending.  Just give us a little more time to persuade him.

The fiscal cliff's worst impact will be to the economy over marginal tax rates.  I have looked at the military cuts, and they are mostly back loaded.  Some will immediately take effect and there will be a great hullabaloo, but I don't take them seriously, especially in the long term.  The regulatory cliff will probably be far worse for the economy.  Obama will unleash the EPA and the Labor department on American businesses soon.  With Europe tipping into recession, this will be a bad time for the economy.

Republicans need to avoid blame for this by being very careful about how they handle the fallout over the negotiations.  Obama clearly wants the negotiations to fail, to force the GOP's hand.  Stalling would seem to be the order of the day.

Glad to be back blogging again after a hiatus for a tough class.  I wrote a paper on cloud computing security that proved more difficult than expected.  I am no expert, but I think the opportunity exists for the government to safely use cloud computing.  However, I am concerned about how the government would implement security measures, and more importantly, monitor for security.  This is the direction the current administration intends to go, so it will be an interesting ride.

Tea Party Canada? Updated Links

Canada seems poised to experience significant economic growth. The Conservative government of Stephen Harper has announced reforms to keep government spending down and entitlement spending under control. I would hope this is what a tea party government would look like in America. Part of their plan includes raising the retirement age will rise from 65 to 67 in 2023. The government also announced:

Under the plan, Canada will cut its deficit this year through "moderate" spending cuts, as the economy grows by 2.1 percent, Flaherty announced.

But much deeper cuts, including the laying off of 19,200 government staff, or 4.8 percent of the federal workforce, are planned for the coming years.

Canada's debt to GDP ratio, while good compared to other industrialized countries, at 84%, is too high for the comfort of the government. As a result they are focusing on not allowing the ratio to rise.

The deficit was projected in the budget to fall to Can$21.1 billion (US$21.1 billion) or 1.2 percent of the gross domestic product (GDP) for the fiscal year ending March 31, 2013, down from a revised Can$24.9 billion last fiscal year.

1.2% of GDP? We can only dream. Finally, I like what they are doing to grow the economy.

Looking to the longer term, the minister outlined immigration reforms to attract more foreigners with skills and money to "strengthen Canada's economy," and a streamlining of the review process for major resource projects.
. . .
Since 2006, Canada has signed nine free trade deals and is now negotiating pacts with the European Union and India, as well as trying to grow its trade ties with China.

Free trade and immigration of skilled foreigners, I like this plan. The article also mentions how the U.S. is losing out by cancelling the XL pipeline and how it has strained relations between the two countries.

H/T CDR Salamander.

UPDATE

Fellow SLOB, WC Varones has some more material supporting this tea party thesis, liberated from the comments.

From August 2010:

You know why Canada doesn't have Tea Party protests?

Because they already have type of sensible government policies that Tea Partiers are trying to implement here!

Relative to the U.S., Canada has lower taxes, lower debt per capita, lower debt to GDP, and a sound banking system:

From July 2011:

In today's WSJ, Fred Barnes writes that Canada had a debt crisis in 1993 very similar to our current situation. And Canada's Liberal prime minister saved his country by doing exactly the opposite of what Obama is doing now.

The Challenge of Tax Reform

Paul Ryan's budget proposals are being excoriated by the left. His push for reform is of course laudable, but we should acknowledge that there are some difficulties with the approach he has taken. First the good stuff.

Mr. Ryan wants to avoid a tax increase and reform the tax code because he realizes that the budget will never balance over the long term without economic growth faster than today's 2% a year.
. . .
He has also issued a second budget estimate based on evidence from the 1960s, 1980s and 2000s that tax reform and spending restraint will increase GDP by about 0.5 to one percentage point a year. This means the Ryan budget reduces the debt to GDP ratio to 50% in 10 years from 74.2% this year (and heading higher) and thus steers the U.S. away from the Greek fiscal rocks.
. . .
But what really matters on spending over the long term is entitlement reform, and on that score Mr. Ryan goes further than any Republican Congress or President since 1995. He understands that without converting Medicare into a market-based program with more choices for seniors, and without devolving Medicaid to the states and repealing ObamaCare, tax increases will soon become the political default option.

I agree that reforming entitlements, including social security, not just medicare and medicaid are necessary elements of reform. The Rebublican party needs more Congressman like Ryan.

Ryan proposes a simplified two tier tax system with rates of 10% and 25% and a corporate rate of 25%. He proposes to pay for this with unspecified cuts to tax loopholes. The following chart from the CBO illustrates the relative size of the loopholes, aka tax expenditures, on the budget in GDP percent.

The problem is that every one of these deduction/credits are very popular. What do Republicans propose to remove to make up for the lowered rates? According to Ruth Marcus at the Washington Post, there are about $12 trillion over ten years in such "tax expenditures" and Ryan needs $4.6 trillion over the same period to keep revenue static. However, I'm not sure revenue needs to be static, since Ryan's goal is to reduce the federal government's size to under 20% as it has historically been. Even so, which deduction is the tea party supporter willing to forego?

• Taxing health care benefits makes sense to me, but can you imagine the uproar after Obamacare is repealed or struck down and now we want make health insurance even more expensive?
  
• Do we really want to discourage saving for retirement by taking 401(k) and IRA savings?
• Mortgage interest is very powerful in propping up the prices of homes.
• What about long term capital gains? Don't we want to encourage investing?
• How about state taxes? Doesn't seem fair to pay taxes on money that was taken away by taxes.
• Charitable giving? How are we going to show that we need less government if charities don't step up.
  

These are tough calls. My belief is that we are going to have to go for a package deal that persuades people that they are better off without the deductions in return for lower rates and growth.

Fighting the Good Fight in Minnesota

You may have seen the news that the Minnesota government has been shut down over the lack of a budget. Democrat-Farm-Labor (DFL) governor Mark Dayton (pouty-faced) has rejected the budget from the Republican run legislature, calling it draconian. The dispute is pretty simple. The Republicans want to hold the line on the budget and the governor does not. The cause of most of the budget woes come from increases in the Health and Human Services budget, which was previously papered over.

“We were given about $1.5 billion in stimulus dollars last time to help us weather the storm,” said Sen. Kathy Sheran, a Mankato Democrat who serves on the Senate Health and Human Services Committee.

Good to know the stimulus dollars were going to productive ends, like putting off the day of reckoning for state budgets. Meanwhile, the health care costs that make up 79% of the HHS budget in Minnesota are going up. The Republicans are right to come to grips with this reality, or it will consume future budgets with nothing but tax increases forever. From the same article:

Under current policies, the spending just for Medical Assistance would increase to $9.7 billion and would consume 79 percent of the HHS budget.

About half of the jump in costs is due to the aging population, which is creating an ever-growing number of elderly citizens in need of care, and growth in the number of low-income Minnesotans eligible for state-provided medical insurance, according to a nonpartisan legislative fiscal analyst. The other half of the skyrocketing price of Medical Assistance is inflation in the cost of medical services.

If Republicans wanted to be really bold, they might propose an insurance voucher plan to reign in these costs. Between rising costs to carry on business as usual, and the weight of increased pension obligations, we can anticipate more such fights in other states.

Interestingly, even some Democrats seem to be taking the issue of state spending seriously, even as their union supporters grumble about being betrayed. The math is inexorable. States that have kept government in check like Texas and Indiana are going to grow as businesses relocate. Reminds you a little of Atlas Shrugged, perhaps? (Shane, that's for you.)

The Spending Problem, Defense Budget and Anonymous Commenting

Noted commenter Anonymous posted a lengthy diatribe asserting that military spending is the primary source of our budget woes. If that were only the truth. From my previous post on the complexities of this subject:

Here is a chart from 2010.

Further analysis of the President's Budget submission for 2012 contains the following projections, total mandatory Social Security spending for fiscal year 2012 is $764 billion where as total defense spending is $696 billion, which includes some spending by the FBI and DOE not part of the Defense Department budget. However, since the cost of operations in Iraq and Afghanistan, to the tune of $118 billion, are considered outside of the defense budget, one might argue that total defense spending is the single largest item in the budget. However, the sum total of entitlements and mandatory spending is still the largest issue with the budget.

However, this does highlight the significant impact of the cost of military operations on the overall federal budget. Even though I supported the wars in Iraq and Afghanistan, I have to concede that they are expensive. This is just one more reason why the founders reserved the power to commit the nation to war to the Congress, which is also the branch charged with passing the budget. Open ended commitments need to be considered in light of fiscal realities. The President has announced a draw down in Afghanistan, that is probably needed. However, I am concerned that in the long run we will just end up with another surge, because we didn't fully defeat the Taliban. In the long run, committing resources to a complete victory followed by swift withdrawal is the way to keep the cost of war low. Unfortunately, we have allowed ourselves to be drawn into nation building with its attendant cost.

Anonymous also calls for some harsh penalties for members of the military who have ". . . carried out war without a Congressional Delcaration [sic] on trial war crimes give them the death penalty and fire all the troops who carried out war crimes and give them the death penalty too." However, it is the Commander-in-Chief who has committed U.S. Forces. The constitution gives the Congress the power to remedy this situation. Why isn't the commenter calling for the President to be hanged? Because there is a constitutional process to deal with all of this. The Congress has the power to impeach the President for failing to follow the constitution. Due process is at the heart of our Republic. Calling for the willy-nilly hanging of members of the military is certainly contrary to law and would be a revolting sight to the vast majority of Americans. As to war crimes? That is an offensive statement. Today's military is the most professional and ethical in the history of the world. When the law is violated, members of the military are prosecuted. I know from personal experience that military mission planning is performed with lawyers involved to ensure the reduction of damage to civilian populations. Impugning the military because one doesn't agree with the policies of the commander in chief is a coward's game; place blame where it belongs.

My policy of allowing anonymous commenting on this blog is sorely tested by the defamatory postings of anonymous commenters. Their anger and vitriol is indicative of a sense of powerlessness that is truly a personal, not a political problem.

Whether you like or not.

Shut Down Averted - So What?

Hero of the hour.

So a government shutdown was averted. Is that really significant? In my opinion, yes. Because the deal continues the path of budget reduction, even if small. It turns the tide regarding spending by the feds. Further, it sets the tone for the debate for the next fiscal year.

I would also like to point out Boehner's negotiating skills, as reported in the Seattle Times.

The Planned Parenthood provision remained until it was dropped late Friday. In return, Republicans got more spending cuts.

From Politico, here are some more Republican victories from the spending bill.

— Guarantees Senate debate and vote on repeal of Obama’s health reform law. The House passed such a bill in January.

— Requires numerous studies of health reform that Republicans say “will force the Obama administration to reveal the true impact of the law’s mandates,” including studies on the law’s affect on premiums, the number and cost of contractors hired to implement the law and “a full audit of the waivers that the Obama administration has given to firms and organizations – including unions - that can’t meet the new annual coverage limits.”

— Denies additional funding to hire more IRS agents.

— Requires mandatory annual audits of the Consumer Financial Protection Bureau, created by the Dodd-Frank financial reform law, by both the private sector and the Government Accountability Office. The audits will examine the effects of the agency’s actions on the economy, including its impact on jobs.

Some of these provisions do not have the practical effect of repealing Obmacare, but the steady drip of negative publicity that will ensue will hurt the President's re-election chances.

Meanwhile, I cruised over to DailyKos to check the pulse of the left. Seeing the anger on the left, especially over the idea that there should be any spending cuts, makes me smile.

And that's what touting the "biggest annual spending cut in history" as a good thing does. More lipstick from Harry Reid in giving kudos to the other side. Instead of praising the Republicans, why not come out and say the GOP screwed rank-and-file Americans? Why not say the Democrats did what they could to slow them down, but that now millions will suffer because of the cuts the party had crammed down its throat to avoid the entire government being shut down? Hell's bells, the Democratic leadership could have even said they did it for the troops.

I also find it ironic that the President is now taking credit for spending cuts, when his budget, as submitted did nothing of the kind. As Pops always says, even a blind pig gets an acorn once in a while.

Look at me, I'm cutting the budget, wee.

Frankly, the bigger budget fights lie ahead. Once we start the debate about entitlements, we are really going to have fight on our hands. But there was no way that entitlements should be part of the current year budget fight. To use a basketball analogy, this fight was akin to getting the best winning percentage you can, going into the playoffs. It's helpful, but you have to win in the playoffs no matter what your regular season record. The playoffs are going to be the debate over entitlements. If we don't get those under control, they will get themselves under control as our country goes into default on its debt.

Well Played

Speaker Boehner has taken an important step to insulate Republicans from criticism over a potential government shut down by passing another stop gap spending measure. By immediately announcing that he would veto the measure, the President is signalling that he is the one who actually wants to shut down the government. In fact, if the Senate does not act or the President vetoes the spending measure, then the Democrats will actually be responsible for the shut down. Further, since the stopgap measure only includes $12 billion in cuts, they can hardly claim that the cuts are draconian.

I anticipate that if polling on this question gets started soon, the Democrats are going to find themselves in a world of hurt over this issue. It started with their failure to pass a budget last year, when they held a huge majority in both Houses. Now, they are unwilling to accept that the Republicans were sent to Washington to reduce deficits, primarily by cutting spending. To paraphrase Obama from a previous discussion, "The election's over, we won." The narrative doesn't play well recently, either. Joe Biden left town when he was supposed to be negoitating for the President. The President's budget was laughed out of town when it was presented. Up until this point he has shown his usual leadership skills in solving the problem. Threatening a veto makes him look like a petulant child. Even labor negotiations often drag on with interim agreements, giving both sides time to work things out. But the President has put his own political standing ahead of the good of the country. He has made a mistake on two counts, thinking the country won't notice and thinking that it will enhance his standing.

Petulance.

Today's Spending Bill

All the talk today is about the Republican split on spending and how unhappy everyone is with the most recent CRA. (That's continuing resolution authority, for us non-Beltway types, where the government is funded incrementally for a few weeks or even days.) 50 Republicans voted no, on the idea that another $10 billion in cuts to get the bill passed was insufficient. Make no mistake, this is a huge victory for Speaker Boehner. He passes another spending bill with cuts, he is making the Dems play defense, but he is getting enough of their votes so that Obama is in no position to veto. Further, the only debate is how much further do we want to cut? Controlling the debate is important, because it continues to put the left in the bad light of being in favor of earmarks (whose elimination was used to reduce some of the spending) and general cluelessness.

Further, since the measure is only temporary, there is another chance to get more cuts. Even though politicians from both sides are complaining about having to incessantly debate short term spending measures, this is what democracy is about. As Dean frequently opines, Democracy is like, hard.

You know you're doing something right when you annoy Chuckie Schumer and he tweets:

"It's time for @SpeakerBoehner to abandon the Tea Party and work to reach bipartisan consensus on the budget," Sen. Chuck Schumer, D-N.Y. tweeted Wednesday.

In Case We Forgot What the Budget Fight is About

Keith Hennessey does a great service by graphing the data in the President's budget submission (H/T Greg Mankiw.)



I previously said that the President showed a lack of leadership on his budget submission. After looking at this graph (click to enlarge), I retract that judgment. The President has displayed total political cowardice and cravenly submitted a budget that will cause harm to the nation.

I guess he expects the Congress to save him from himself and produce a good budget. How'd that work out on health care.

The other important point made by Hennessey is that everything to do with government rises. Government spending increases, sucking resources out of the economy. Taxes rise, sucking incentive out of the economy. The budget deficit rises, sucking credit out of the economy. This budget basically. . . , well, you get the idea.