ConservativeHome's Big Ideas blog

Herb London: From coming boom to the coming gloom

Herbert London is president emeritus of Hudson Institute and author of the book Decline and Revival in Higher Education (Transaction Publishers). 

In a book entitled the Coming Boom by Herman Kahn published in1982, Kahn argued that despite the double digit inflation of the Carter years and the “stagflation” that plagued the period from roughly 1976 to 1981, an economic boom was just over the horizon. As it turned out Kahn was right as the ensuing Reagan years ushered in a period of economic growth and vitality.

What Herman Kahn observed in the book was the following: tight monetary policies would lead to high interest rates and a decrease in inflation; deflationary trends lead inevitability to a more efficient use of energy; issuance of long term bonds will allow the government to tap into new markets; the demand for all commodities will increase dramatically due to pent up opportunities; debt relative to GDP is small; output of workers is likely to increase; the lag between invention of technology and commercial application is shortening; the US is emerging as the globe’s undisputed military power and, most significantly, a psychology of achievement and affluence is emerging that provides full confidence in the future.

These claims reinforced Herman Kahn’s view that boom times were coming. But I wonder what Kahn would say today? The recent congressional debt limit debate gave the country an opportunity to assess where we stand and by my lights, was a moment for gloomy predications. My chronic optimism serves as a modest counter weight, but the evidence provided in this piece speaks to conditions very different from 1982, most especially the sense of weltschmerz that dominates the present debate about the nation’s finances. But there is more, much more that should be considered.

The debt of $14 trillion is almost equal to GDP. Dollars put into circulation have increased by 50 percent since 2008, an obvious effort to monetize the debt. The unemployment rate at the moment is 9.1 percent; however if you include those no longer seeking employment, the rate is over 15 percent (13.7 million Americans are unemployed and 989,000 have given up looking for working.) Overall there are 6.4 million in the long-term unemployment category. The unfunded liability for Medicare, Medicaid and Social Security is $117 trillion, approximately $17 trillion for Social Security and $90 trillion for Medicare and Medicaid. That aggregate total is more than all the registered wealth on the globe. The CBO (Congressional Budget Office) predicts the debt in 2020 will be $20 trillion. The sum necessary to finance a debt of that magnitude is roughly equivalent to today’s defense budget.

The anticipated US fiscal budget for 2011-2012 has revenue at about $2 trillion and expenditures at $3.7 trillion with a deficit of $1.7 trillion, the largest in U.S. history. This deficit is four times greater than the one in 2008. Moreover, this figure does not take into account pension liability, which is unfunded at the state level, and accounts for another $1 trillion.

As of February 2011, the last date on which figures were available, 44.2 million Americans are on foodstamps, approximately one in seven people. Forty-seven percent of Americans do not pay personal income tax. Thirty-six percent of Americans, who file tax forms do not pay. About 142 million Americans who filed did not pay anything in 2009. Income level, nominal and actual, above $50,000 declined from 2008 to 2010, with the most precipitous decline in the $100,000 to $150,00 category. The number of those in poverty has increased 9.5 percent since 2009 with a total of 43.6 million total. China presently holds $1.14 trillion in American securities, a condition that could put American financial interests at risk.

There were 89,000 people who received checks from the Stimulus program who were dead or in prison, and 3,700 tax delinquents who received stimulus funds. The individual share of the national debt is $46,000. Gold has gone from $853 a troy ounce in 2009 to $1,800 today, a condition that bespeaks uneasiness with US markets. Household income has decreased by .7 percent since 2009 and there has been an increase of 17.1% in bank failures since 2009.

By any measure these statistics paint a gloomy picture, one that suggests the nation is at the crossroads. If you focus solely on the debt, it is easy to overlook the most fundamental problem. This nation faces a crisis not because taxes are too low but because government is too big, too intrusive, and too dominant.

If there isn’t any change in federal policy, if we continue down the road we are on, any extrapolation of the numbers leads to be a disastrous result. By 2050, according to the CBO spending will exceed GDP by 42 percent. How can our liberties remain intact when government controls such an extraordinary portion of the economy? Yet any discussion of entitlement program reduction is considered the third-rail in American politics. This disparity between political sensitivity and economic reality has to be addressed by a Congress that understands the problems but is resistant to real reform.

If the Tea Party movement stands for anything it is the belief that the growth of government imperils freedom. That is an understanding Americans must imbibe. However there is the danger the United States has reached a Platonic tipping point is which the number of takers, i.e. outliers is for greater than the number of givers i.e. tax payers. This is not a scenario for democracy’s survival. And yet, I maintain a faith in national resilience. At some point, I believe the public will awaken to the economic threat forcing the Congress to act appropriately.

As I see it, we’ve gone from the “coming boom” to the “coming gloom”, but what lies over the horizon remains undetermined.   

Fred Siegel: Historians in the not-too-distant future will be asking what happened to the middle class in America

Ryan Streeter
Follow Ryan on Twitter

I always stop to read Fred Siegel when he writes something.

His new essay in City Journal opens ominously:

Forty years from now, politicians, writers, and historians may struggle to understand how America, once the quintessential middle-class society, became as socially stratified as Europe or even Brazil

He uses New York, which has experienced a dramatic drop in middle class families in just a generation, as a picture of what we see happening in pockets across the country.

He writes:

New York is the picture of what the Tea Party fears for the country at large. In the 1970s, liberal mandarins seized the high ground of American institutions in the name of managing social, racial, gender, and environmental justice on behalf of the disadvantaged. Their job, as they saw it, was to protect minorities from the depredations of middle-class mores.

The result of rule by elites has been a breakdown in social mores, expanding bureaucracies, and middle tier job loss as upper tier jobs grow. It's worth reading the article in full to get the statistics and claims he uses to substantiate his argument.

He then offers this lens through which to view the Tea Party:

The Tea Party is the national voice of the private-sector middle class—despite the demonizations heaped upon it by public-policy elites whose own judgment and competence leave much to be desired.

Key steps on Rick Perry's path to 2012

Between the Ames straw poll in Iowa and Rick Perry's anticipated announcement, August 13 is shaping up to be a pretty interesting day for GOP voters.

And as speculation only continues to swarm ahead of Saturday's events, Richard S. Dunham in the Houston Chronicle today offers an interesting look at the choices and challenges facing the Texas Governor in his possible path to the White House:

The tea party primary

For Perry to become the tea party favorite [and thus the Romney alternate], he must emerge from a pack of five possible candidates registering 12 to 16 percent among tea party Republicans in the Pew survey. His top rivals: Minnesota Rep. Michele Bachmann, Texas Rep. Ron Paul and Georgia businessman Herman Cain.

The money primary

Perry backers say [he needs] to go from zero to $10 million in a month, with a goal of at least $75 million to carry them through Super Tuesday.

Rudy-palooza

Three years ago, Perry endorsed an unlikely presidential candidate, Rudy Giuliani, and campaigned hard for the former New York mayor in Iowa. This time, Perry is counting on the moderate Yankee to reciprocate.

The Iowa caucuses

A major asset for Perry: Iowa's Republican electorate is very conservative on social issues. Meanwhile, the big field and his late start give him an opportunity to lower expectations for his performance.

The New Hampshire primary

Perry supporters will downplay his prospects in the scheduled Jan. 24 primary to minimize the political momentum generated by the expected victory of Romney.

The South Carolina primary

This very conservative, Southern state is fertile ground for Perry. Many of the state's most talented operatives have signed on with other contenders.

The sprint to Super Tuesday

Perry is counting on a political coalition including Christian conservatives and the remnants of Giuliani's 2008 campaign organization. The Texas governor hopes to sweep the Super Tuesday South [and California] to overcome any edge others might have elsewhere.

Bridges to the establishment

If Perry is standing after Super Tuesday, he'll need to make inroads with establishment Republicans to win a first-ballot majority at the Republican National Convention.

Target: Tampa

Perry would have several goals at the GOP convention in Tampa: Unifying his party, defining the stakes of the 2012 election and taking aim at key swing states, starting with host Florida.

Next stop: 1600 Pennsylvania Ave.

With the nomination in hand, Perry would focus like a laser beam on the economy, comparing his Texas record of job creation and balanced budgets with President Barack Obama's record of rising unemployment and deficits.

Dunham's full insight on each of the 10 steps is available to view here.

Paul Revere: The downgrade points to a dire economic and fiscal condition that hits the rising generation the hardest

Paul Revere is in his 20s, and is concerned about the impact of the growing national debt on his generation. He is a regular ConservativeHome contributor.

With the long-expected downgrade of America’s long-term expectations by Moody’s, and the immediate downgrade of America’s bond rating by S&P on Friday evening, politicians should have an interesting weekend. This downgrade could very well lead to higher interest payments- and an extra one percent rate hike would equal $150 billion in annual payments. That’s about 4% of the 2011 federal budget.

Of all the analysis at the link above, the takeaway is the following (paraphrased): the recent debt deal did not cut enough future debt; the political debacle surrounding the debt deal showed political weakness and political inability to address the problem; and neither tax increases or significant entitlement reforms are on the horizon.

Let’s look at a few items related to all of this:

• This year alone, the deficit— the annual payments by Congress that are spent with borrowed money— is expected to be $1.6 trillion. This means each of the 150 million workers in America will owe $10,667 above and beyond their own personal debt by the end of the fiscal year, September 30.

• Throughout 2011, Congress has debated how much to cut from that $10, 667. In the most recent debate, on whether or not to allow Congress to borrow more money, the final plan cut less than 10% of the expected debt per worker in 2021. Workers, you can thank your Member of Congress for bringing your portion of the public debt in 2021 from $161,637 to just over $146,000. This is in addition to any credit card, housing, car and college debt you may have incurred.

• Prior to the most recent changes to the government’s estimates on the life of Social Security and Medicare, payroll taxes were expected to rise from 15.3% of income to 25.07%. With the new estimates shaving a year off the life of Social Security, and five years off of the life of the hospital fund of Medicare, that expectation may have gotten much worse.

Of course, instead of paying extra Social Security taxes, you could just lose 22% of your scheduled benefits. Either/or.

• In fiscal year 2010, interest payments totaled $414 billion. Through five-sixths (83.333%) of FY 2011, interest payments have totaled $413 billion. While the year-end calculation of interest payments is not a straight-line calculation, if we end up with the $1.6 trillion deficit CBO estimated, our national debt will be about $15.1 trillion. This means our interest alone in 2011 will be $445 billion- fully 11.71% of the federal budget.

With the downgrade, of course, those payments could be about one-third larger.

When it comes down to it, old people won’t be catching the full fallout of America’s failed fiscal policies. It will be the young people who can’t get jobs and thus can’t invest, pay off personal debt or buy their first home prior to 30. It will be the young people who can’t afford to retire before 75 because higher taxes will decimate their paychecks. It will be the young people who will watch as America turns into the failed empires of Rome, Napoleonic France and the USSR— and who will be unable to pass along to their own children a better way of life.

Budget Showdown Lesson: The Old Clinton Playbook is Officially Out of Date

Tevi Troy is a Senior Fellow at the Hudson Institute and author of Intellectuals and the American Presidency: Philosophers, Jesters, and Technicians. He has previously served as a senior White House aide, and worked for the House Republican Policy Committee during the 104th Gingrich Congress.

Just after the election last November that brought back Republican control of the House, I predicted here that Republicans would do much better in a budget showdown with President Obama than the Gingrich Congress did against President Clinton in their own budget showdowns of the 1990s.

Obama and the Democrats thought otherwise, and he even prepared for a GOP Congress by reading books about the Clinton administration, and studying up on how Clinton outmaneuvered the GOP during the 1995-1996 government shutdown. The Democrats seemed to be counting on breaking out the old Clinton playbook to give the GOP another thumping and to regain political momentum. 

While partisans on both sides continue to argue over who won and who lost the recent debt ceiling face-off, it is quite clear that the GOP did not get their heads handed to them, as they did under Clinton. Each of the three reasons I mentioned last November played a key role in the establishment of a new script for budget confrontations.

The first reason had to do with leadership, as I predicted that House Speaker John Boehner “won’t be trapped into making the same kind of tactical and rhetorical mistakes that Clinton goaded Gingrich into making.”  The difference between Boehner and Gingrich was quite apparent over the past few months, as Boehner led his oft-unruly caucus with a steady hand, giving when he had to, but staying true to his party’s core principles throughout.  Most importantly, he never made any major public mistakes, as Gingrich did when he complained about Clinton’s treatment of him on Air Force One, which led to the infamous and iconic “cry baby” headline in the New York Daily News.  Boehner’s steadiness and mistake-free style prompted the Democrats to change tactics and aim their fire at Majority Leader Eric Cantor instead, which had only limited effectiveness.

Second, I noted that the GOP conference elected in 2010 was very different than the post-1994 caucus, and quoted Fred Barnes’ observation that “[m]ost of the 80-plus new members are spending hawks.”  This reconfigured caucus made a real difference in recent days, as it became abundantly clear that they would hold the line when it came to both insisting on spending cuts and resisting tax increases.  Democrats and other commentators have called them “terrorists,” “jihadists,” and the like for this stance, but they also now know that the GOP caucus is not from the go-along-get-along school of public officials.

Third, and most importantly, I noted that the change in the media over just the last decade and a half had given Republicans new outlets for getting across their message, and the Republicans made the most of these outlets. Tools like search engines, YouTube, and social media have leveled the playing field and improve Republicans’ ability to disseminate their message.  In the previous budgets showdowns, Republicans fought an uphill battle against media bias.  This time, Republicans still had to deal with media bias, but they also had sympathetic outlets on cable, in print, on the web, and over the airwaves that did not exist previously. 

Furthermore, the Internet helped keep the media honest. Republicans may not always agree with the decisions of a “neutral” judging site like PolitiFact, but PolitiFact judgments will call Democrats out for mis-statements along with Republicans. In the debt ceiling debate, for example, Politifact found that Obama’s statement that “a ‘clear majority’ of Republican voters think tax revenues should be included as part of a budget deal” was mostly false; that Harry Reid’s claim that the U.S. lost 8 million jobs during George W. Bush's years in office deserved a “pants on fire,” as did Nancy Pelosi’s chart minimizing the Obama administration’s role in national debt accumulation; and that Obama earned a Full Flop on the Flip-O-Meter for having switched positions on raising the debt limit.

This useful service, coupled with the growth of ombudsmen at such previously impregnable institutions such as the New York Times and the Washington Post, as well as legions of bloggers flyspecking every word from politicians and reporters alike, helped change the media equation for Republicans.  These factors do not eliminate media bias, but they sure make it harder for media to get away unchallenged with obvious displays of bias.

The changing face of the media can best be seen in the way the White House press corps challenged Obama and his communications apparatus on his lack of a plan for dealing with the debt ceiling hike.  Obama has used this tactic of lofty rhetoric coupled with elusive details before, particularly on health care, but in this instance, the tactic failed him, as reporters kept asking him and his representatives where their plan was.  At one point, NBC’s Chuck Todd pressed White House Press Secretary Jay Carney so hard on this point that Carney got flustered and asked “You need it written down?”  In the past, the answer might have been no, but this time around, thanks to the collapse of the mainstream media’s monopoly on the news, the answer was “yes.”

Unfortunately for the White House, none of these three factors are likely to change anytime soon.  Boehner has shown that he can remain cool under pressure, the Republican spending hawks are further emboldened by their show of resolve, and the media landscape is getting ever flatter. What all this means is that President Obama needs to throw out the Clinton playbook and come up with a new one.  1995-1996 version is now officially out of date.

Ed Glaeser: Yes, we need a balanced budget amendment, but to do that, let's be honest about how the feds borrow to help states

Ryan Streeter
Follow Ryan on Twitter

I missed Ed Glaeser's column this week on the merits of a balanced budget. Ed is one of the most interesting economists in America today, and so it's always worth listening to him when he weighs in on policy matters.

After pointing out that both parties have helped make the case for a balanced budget by showing so much fiscal promiscuity over the past few decades, Glaeser makes this interesting observation:

Another reason to favor more federal fiscal restraint is that we could use a better balance between state and federal spending. Over the past 50 years, the federal government has become heavily involved in financing infrastructure, even when those projects overwhelmingly serve in-state users and could be funded with user fees. Why is it so obvious that the federal government has a role in funding rail between Tampa and Orlando, or a big tunnel in Boston?

Washington’s prominence is explained primarily by the federal government’s ability to borrow, and not by any inherent edge it has in infrastructure development. Federalizing expenditures breaks the connection between the projects’ funders and the projects’ users. Any instance when we’re spending other people’s money is an invitation for waste.

This relationship between state needs and lobbying and the federal government's borrowing addiction needs to be explored more. It's an important point.

As far as the amendment goes, Ed rightly says that a balanced budget amendment is both needed and difficult to craft. He suggests that in order to make it through wars and recessions, the budget should be balanced on business cycles, not calendar years. That strikes me as the right approach, but also very hard to do.

So who's actually going to pay off all this new debt Congress just voted for? Meet the Debt Paying Generation

Bill Beach and Dustin Siggins have been working for awhile to wake people up to the reality of life for the Debt Paying Generation - the rising group of young workers who will spend most of working lives contributing a greater share of their taxes to paying off debt than any previous generation.

They have a McClatchey op-ed today worth reading in full.

A few snippets:

The CBO said the initial phase of the Boehner compromise would take the debt per worker in 2021 from about $161,631 to about $156,324 - clearly, laughably inadequate.

The longer that Americans bury their collective heads in the sand, the more extreme solutions will have to be.

When it really comes down to it, the budget debate can be reduced to the following points:

1. Reform our immoral and inefficient tax code, perhaps by replacing it with a flat expenditure tax, such as Heritage proposed.

2. Cut spending.

3. Shrink the size of government employee rolls...More than 30 million people are employed by tax dollars (that's one tenth the U.S. population)

Ding dong, the Keynesian witch is dead: here's why

These words from AEI's Kevin Hassett in today's WSJ are worth highlighting:

Every stimulus effort has not two but three stages.

1. When the stimulus is imposed, there is some positive short-run increase in GDP.
2. When the stimulus is removed, there is an approximately equal and opposite reduction in GDP.
3. But after that, the stimulus must be paid for with higher taxes or ongoing borrowing—causing a further reduction in GDP.

Thus the total impact of the Keynesian policy is negative over its life. This fact is visible even in the fine print of Congressional Budget Office analyses so often cited by stimulus apologists, such as its 2009 finding that the Obama stimulus would reduce output in the long run. (numeration added)

What this means for us, then, is this:

In the lengthy, slow‐slog out of a financial crisis, the stimulus hangover arrives before the recovery has taken off. Temporary stimulus therefore hurts the economy when it is removed and again when it is paid for. The hangover is virtually guaranteed to arrive at a moment when it can push us back into recession.

The two options he says we should pursue are perhaps not surprising but that doesn't make them any less important:

The first is tax reform that broadens the tax base, lowers rates, and reduces taxes on capital income. Over a decade, fundamental tax reform can deliver enduring benefits large enough to offset the residual negative effects of the financial crisis.

Second is entitlement reform. Given the massive imbalances that exist today, consumers likely have little faith that current programs will remain in place throughout their lifetimes. Accordingly, cuts to entitlements that phase in gradually will likely have little impact on consumers' perceived lifetime wealth, as the benefit cuts are already factored into their thinking. If so, government can reduce promised benefits without causing consumption to go down. Such a reduction would restore market confidence and create the budget space to ensure successful tax reform.