Political Economics

[Crafty_Dog]

GM:

That may well turn out to be the case, but I would like to suggest that this article has a simple, primal fundamental flaw (gee, from POTH, who would have thought? )  It does not consider the option of GROWTH. 

Serious amounts of money now sit on the sidelines due to uncertainty and stupidity emanating from the White House and Congress.   A not insignificant portion of our deficit spending is due to fed revenues contracting due to economic contraction.  If we start getting the government out of the way (e.g. no tax increases-- and maybe even tax rate cuts such as cutting corp tax to levels of other advanced countries, blocking the implementation of Obamacare, stopping the madness of massive deficits, start drilling for oil and gas, etc etc) I think we will be amazed at what will happen.

The November elections are of historic significance-- as will be what the new Congress does and does not do.  If the elections fall short (and they might) and/or the Republicans fall short (and they might!) then the article will be right.

[G M]

Agreed.

[Body-by-Guinness]

Whoa:

http://www.economist.com/content/global_debt_clock

[G M]

So how will this all play out?

[DougMacG]

When the governments all default, will we be able to take back their assets, like the 30% of American land that the federal government owns?  http://www.nationalatlas.gov/printable/images/pdf/fedlands/fedlands3.pdf

Crafty, yes, growth is the only way out other than collapse and implode.  NY Timers hasn't considered that because they oppose it.

If debt burden is x% of all income, then double your income while you pay down one dollar of debt, and your debt burden is cut by more than half - survivable.

Instead we have income stuck and runaway deficits while we wait for a tax rate increase we know will be contrationary.

The new congress will have its hands tied in vetoes unless some new light comes on in his anti-productive-economy brain and there is certainly no sign of that.

[Body-by-Guinness]

I dunno how this will play out. All I'm sure of is that with incentives this perverse--borrowing money to fling at underproductive constituencies--and debt this immense, all sorts of unintended consequences will follow.

[Body-by-Guinness]

Heh. Should riff on this in 2012.

We Should Copy the Clever British Campaign against Higher Capital Gains Tax Rates
October 17, 2010 by Dan Mitchell

Here are a handful of the posters being used in the United Kingdom to fight the perversely-destructive proposal to increase tax rates on capital gains. (for an explanation of why the tax should be abolished, see here)

Which one is your favorite? I’m partial to the last one because of my interest in tax competition.

By the way, “CGT” is capital gains tax, and “Vince” and “Cable” refers to Vince Cable, one of the politicians pushing this punitive class-warfare scheme.

[Body-by-Guinness]

A Limited Government Amendment
JEFFREY H. ANDERSON

In the eyes of America's founders, unlimited government was a recipe for tyranny. It was with this in mind that they designed a series of carefully planned restraints for our republic, establishing a government with powers that are specifically enumerated, and explicitly granted by the people. Indeed, in Federalist No. 45, James Madison stressed that the new Constitution would not be the "same doctrine" of the "old world" — namely, "that the people were made for kings, not kings for the people" — simply "revived in the new, in another shape." Rather, Madison promised, "The powers delegated by the proposed Constitution to the federal government are few and defined."

But Madison's expectations about the self-containing nature of America's new government proved a bit too optimistic. In the two centuries since, the size and scope of the federal government have sporadically, but steadily, expanded. And in the past few years, a $700 billion bailout for Wall Street, a $787 billion economic-stimulus package, and the passage of a major health-care overhaul — which aims to inaugurate a trillion-dollar-plus entitlement and dramatically reshape the relationship between individuals and the state — have brought the tension over federal spending to a head. Tea Party protests have sprung up across the country; their participants object primarily to the centralization of power in Washington at the expense of individual liberty, and to the profligacy of Congress at the expense of the nation's future solvency. To a degree not seen in many decades, Americans appear determined to provide a correction to the expansion of federal power.

In Madison's defense, however, this expansion has not been a product of the Constitution as written and ratified, but rather of changes to it, through rulings and amendments. These include the Supreme Court's expansive reading of the power to regulate interstate commerce, its severing of the power to tax from Congress's other enumerated powers, its narrow reading of the Tenth Amendment's reservation of powers to the states or the people, and, above all, the addition of the 16th Amendment, granting the federal government essentially unlimited power to tax Americans' income. All are developments that have inflated federal power well beyond the limits originally established by the Constitution.

Yet this warping of the framers' intent is less a cause for alarm than for action. If nothing else, the growth of the state clarifies our responsibilities as citizens. After all, the Constitution didn't emerge from the clouds: It was written by flesh-and-blood Americans, in response to the events and challenges of their day. And it includes an amendment provision allowing later generations to adapt the document to the events and challenges of our own times. Today, a correction is in order — and our founders wisely furnished us with the means to provide it.

THE PERILS OF THE BOTTOMLESS PURSE

In short, we need to pass a constitutional amendment to limit our federal government. The surest and best way to impose such a constraint is to cut off the source of government's growth, by limiting its power to spend. The great powers of government are those of the sword and the purse — and ours needs to be told that the purse is not bottomless.

Our government was not designed to serve as a clearinghouse for Americans' money — far from it. In the words of the Declaration of Independence, governments derive their "just Powers" from "the Consent of the Governed," and "are instituted" "to secure" "certain unalienable Rights," among which are the rights of "Life, Liberty, and the Pursuit of Happiness." Yet as with the Constitution, this early principle, too, has been altered over the years by those seeking to expand government's reach. In crafting the 1936 Democratic platform, President Franklin Roosevelt replaced government's duty to secure the right to pursue happiness with a government responsibility to promote happiness itself: "We hold these truths to be self-evident — that the test of representative government is its ability to promote the safety and happiness of the people," Roosevelt declared. Of course, this is not exactly what the founders had in mind.

The Declaration's language is rooted in the political philosophy of John Locke, who wrote that we have a natural right to property in three forms: "Lives, Liberties, and Estates, which I call by the general Name, Property." Therefore, according to the Declaration of Independence (as informed by Locke), the purpose of just governments is not to act without limit, in any manner they wish, but rather to secure our natural and inalienable right to property, broadly understood. As James Madison asserted, "Government is instituted to protect property of every sort," adding: "This being the end of government, that alone is a just government which impartially secures to every man whatever is his own."

Conversely, a government that views itself as the provider for nearly every conceivable human need — rather than as the securer of that which has already been provided by nature, by nature's God, or through the industrious efforts of particular human beings — is liable to have a very different record of activity (and thus of spending). As the Declaration's principal author wrote in an 1816 letter from Monticello, the lesson "that private fortunes are destroyed by public as well as private extravagance" is indeed an important one. Thomas Jefferson continued:

And this is the tendency of all human governments. A departure from principle in one instance becomes precedent for a second; that second for a third; and so on, till the bulk of the society is reduced to be mere automations of misery, to have no sensibilities left but for sinning and suffering. Then begins, indeed, the bellum omnium in omnia [war of all against all], which some philosophers observing to be so general in this world, have mistaken it for the natural, instead of the abusive state of man. And the fore horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression.

It is unlikely that Jefferson would have anticipated the state in which America finds itself today: having amassed $13 trillion in federal debt, including, incredibly, $3 trillion in just the past three years. But he certainly understood the ill effects that follow swiftly upon such government extravagance, and the threats to our well-being and liberty that we face if we fail to change course.

The growth of government is therefore at the heart of our dilemma, and limiting its future expansion is the key to restoring some semblance of limited, constitutional authority. Both to highlight that problem and to solve it, we need a Limited Government Amendment, to read as follows:

Section 1: The annual rate of growth in total federal spending shall not exceed the rate of inflation, plus two percentage points, and neither budgeted nor actual spending shall exceed this limit, apart from the exceptions listed below. If no budget is passed, then the most recently passed budget, excluding any exceptions granted in Section 2, shall apply.

Section 2: Defense spending shall not be limited during a time of formally declared war, and further exceptions to the spending limits specified in Section 1 may be granted by the legislatures in three-quarters of the several states, upon the application of two-thirds of both houses of Congress, as they deem necessary; but any such exceptions shall not be included in determining spending limits for subsequent years.

Section 3: The spending limit for the first fiscal year following the cessation of hostilities in a declared war shall be the limit that was established for the fiscal year preceding the declaration of war, excluding any exceptions granted in that year, and adjusted for compounded inflation through all fiscal years completed in the interim.

Section 4: The rate of inflation used in determining spending limits shall be the rate from the most recently completed fiscal year prior to the passage of a given year's budget, and the method of measuring inflation shall not be altered substantially from long-established norms. Spending that is not defense spending shall not be characterized as such; each exception granted by the states shall apply only to one fiscal year if not granted anew; and every citizen of the United States shall have standing to sue in federal court to enforce the language of this amendment.

Such an amendment, far-fetched as it might seem at first, would be both practical and reasonable. Merely proposing it and forcing a debate on it would put the question of the size and scope of government squarely before the American people; it would also force the champions of a ballooning welfare state to make a case against any real limit on government's growth. And were the amendment actually to be enacted, it would not only dramatically reduce future deficits and debt, but would also revive the principle that government has limited ends which it ought to pursue by limited means.

A NEEDED RESTRAINT

Of course, the mere mention of a constitutional amendment — let alone one that would, after a century of ever-expanding government, so explicitly constrain the growth of the state — is likely to draw claims of "extremism." But there is nothing extreme, at least in the American context, about the notion of the citizenry limiting the government. The founders universally embraced the idea as a necessary condition of liberty and prosperity, even as they recognized that it would require ongoing diligence on the citizens' part.

And indeed, the Constitution has undergone frequent updates since 1787 — particularly throughout the first half of the 20th century, and as recently as 1992. In that year, the 27th Amendment — a provision to prevent a sitting Congress from changing its own salary — was enacted. The amendment had originally been proposed in 1789 along with the amendments that became the Bill of Rights; it was part of Madison's effort to inspire public trust in the new government. The proposal was passed by Congress but ratified by only six states, and had lain mostly dormant for nearly two centuries — until an undergraduate at the University of Texas discovered the proposed amendment while doing research for a course paper. Realizing it had no expiration date, and recognizing that congressional pay was still a thorny issue, he began a ten-year letter-writing campaign to state legislatures, undertaken at his own expense. Eventually, his effort succeeded; the amendment was ultimately ratified by 45 states. It was a classic case of an average citizen remaining vigilant over the Constitution — and a fairly recent case at that.

[Body-by-Guinness]

Even so, there are some who now say that citizen action isn't in order; that the centralization and consolidation of power in Washington is simply the irreversible wave of the future; that we no longer have anything to fear from such power (or anything to lose); that the founders' experiment is an anachronism; that limited government is dead.

But that is the extreme view. The reasonable view, plainly supported by the events of recent years, is that federal spending is out of control and needs to be limited. This would also appear to be the popular view, as the Tea Party indicates a groundswell of support for limited government. The challenge, however, is channeling that salutary energy, momentum, and civic engagement into concrete action of lasting significance. The Limited Government Amendment would have just that sort of profound impact.

And yet it would not require us to do something unrealistic or untried. The amendment would not even prevent the growth of government; it would merely limit that growth to not more than 2% per year in real terms. This is hardly an unheard-of degree of austerity in modern times. Looking at the presidents who took office after 1950, the average annual growth in real federal spending was lowest under Eisenhower (-0.4%), followed by Clinton (1.5%), the first Bush (1.8%), Reagan (2.6%), Ford (2.9%), Nixon (3.1%), Carter (4.3%), the second Bush (4.6%), Kennedy (4.7%), Johnson (6.0%), and Obama (12.7% so far, based on projected 2010 figures). In these tallies, the 2009 omnibus spending bill signed by President Obama is actually counted toward President Bush's spending, since it provided funding related to his 2009 budget. And the portion of the economic-stimulus funds that was spent in 2009 after the program was proposed by President Obama didn't count in his tally, either — because the funds weren't appropriated in Obama's first fiscal year. If they were added to Obama's 2010 spending, his tally would be 22.5%.

As these numbers indicate, limiting the growth of real annual federal spending to 2% has not been typical, but it certainly has been achieved — under a variety of circumstances, without putting the nation's security in peril, and without resorting to extreme austerity. No one would argue that fiscal policy during the Clinton years was a model of tight-fisted parsimony, or that it prevented the nation from responding to challenges at home and abroad. Indeed, during the 1990s — a decade that included the final stages of the Cold War, a new hot war, a sharp economic downturn, and a return to economic growth — both Presidents George H. W. Bush and Clinton kept the average growth in spending below the amendment's limit.

In other words, we have kept federal spending under control before — and we can do it again. But clearly most politicians are not inclined to try. The kind of discipline such an effort would require over the long run thus seems possible only with the help of a constitutional amendment.

Over time, though, the results of such discipline would be extraordinary. Consider that, from 1970 to 2009, in real (inflation-adjusted) dollars, annual federal spending increased from $1.1 trillion to $3.5 trillion. Under this proposed amendment (assuming no exceptions because of declared wars or via the approval of state legislatures), annual spending would have increased from $1.1 trillion in real dollars to no more than $2.5 trillion — $1 trillion less than actual spending. Total federal spending across the four decades would have fallen from $51.4 trillion to $43.6 trillion in today's dollars, a reduction of $7.8 trillion. All other things being equal, our staggering $13 trillion debt would have been reduced to just over $5 trillion. And that's even if Congress had spent every cent it was constitutionally allowed to under this amendment. If Congress had shown any additional restraint, even in some years, the debt tally would have fallen yet further.

Even looking at a much smaller time window — one starting in 2000 — the amendment would still have made a tremendous difference. In the past decade alone, annual federal spending increased from $2.3 trillion to $3.5 trillion in real dollars. Under this amendment, it would have increased from $2.3 trillion to no more than $2.7 trillion in real dollars. Thus, the real-dollar increase would have been, at most, about $400 billion instead of about $1.2 trillion — or only about one-third as much. Total federal spending across the decade would have been reduced by $2.6 trillion (in actual dollars), and 2009 spending would have been only 76% as high as it actually was. Moreover, the highly unpopular $787 billion economic-stimulus package wouldn't have become law, unless three-quarters of the state legislatures had granted an exception to pass it — an unlikely scenario — or Congress had budgeted so frugally as to allow itself the wiggle room for an extra $787 billion in spending (more unlikely still).

The real question, though, is what the amendment would do going forward. Assuming the continuation of the average inflation rate across the past quarter-century of 2.7% — and assuming that, without this amendment, federal spending would continue to increase at the 7.6% rate at which it has grown across the past decade (a reasonable assumption, given that the non-inflation-adjusted rate of increase in federal spending across the past 40 years has been 7.8%) — the results of the amendment would be quite dramatic.

In this scenario (again, assuming no exceptions because of declared wars or via the approval of state legislatures), the 2020 budget would be $7.7 trillion without the amendment, but no more than $5.7 trillion — only 76% as high — with the amendment, a difference of at least $2 trillion in 2020 alone. Total federal spending for the decade of 2011 to 2020 would be $56.9 trillion without the amendment, but no more than $47.1 trillion with the amendment — a difference of at least $9.8 trillion. (In reality, both inflation and federal spending may well be significantly higher in the coming decade; overall, however, the amendment's effects would be much the same.)

When we look at a 30-year period, the savings become astronomical. The 2040 budget would be $33.5 trillion without the amendment, but no more than $14.4 trillion — only 43% as high — with it, a difference of at least $19.1 trillion in that one year alone. Total federal spending across the three decades from 2011 to 2040 would, amazingly, be $422 trillion in today's dollars without the amendment, but no more than $240 trillion with it — a mind-boggling difference of $182 trillion.

Keep in mind that these numbers are not based on the worst-case scenarios for spending without the Limited Government Amendment, but rather on mid-range expectations. Forget the proverbial $64,000 question: When it comes to deciding whether we want this amendment, Americans face a $182,000,000,000,000 question.

Since a trillion — or a million millions — can be hard to conceptualize, here's another way of thinking about it. One hundred and eighty-two trillion dollars over 30 years is a total of $482,311 for every man, woman, and child that the Census Bureau projects will be living in the United States at the end of that period — or $16,077 per person, per year. If you're the sole income earner for a family of four, your share is $1.9 million, or $64,308 per year. That's what average Americans stand to save, annually, from the passage of this amendment.

COLLATERAL BENEFITS

The amendment offers other important benefits and advantages. It would, for one thing, allow the nation the flexibility to address unforeseen challenges. Alexander Hamilton wrote in Federalist No. 23 that "[t]he circumstances that endanger the safety of nations are infinite, and for this reason no constitutional shackles can wisely be imposed on the power to which the care of it is committed." This warning certainly applies to the spending power; thus, the Limited Government Amendment would not place any limits whatsoever on defense spending during a time of declared war. It would also allow for exceptions in other moments of crisis, when the need for additional spending is so plain that the great majority of Americans — through their state legislators — acknowledge it.

As prudent and necessary as the exception for wartime spending would be, it would be equally imprudent and unwise to grant an exception for defense spending on undeclared wars or other conflicts. It is worth noting that the last time the United States made a formal declaration of war was during World War II; all the conflicts since have had some other form of congressional approval (like the Gulf of Tonkin resolution that led to Vietnam, and the vote authorizing the ongoing war in Afghanistan), or no congressional sanction at all (like Korea and other ventures sponsored by the United Nations, and those forays launched by presidential action, like our uses of force in Grenada and Somalia).

Whatever one's views about the wisdom of these undeclared wars, it is hard to dispute that they have proven contentious over the years, deeply dividing the American public. An additional advantage of this amendment — and its explicit tying of defense-spending exceptions to a declaration of war — is that it would force elected officials to be much more careful about entering into foreign entanglements, and would move Congress to accept its constitutional responsibilities and formally declare war when the nation has clearly entered one. Every member of Congress would be on the hook and accountable for the conduct and outcome of each war he voted to authorize. And no use of force could take place without the implicit approval of the American people, through their duly elected congressional representatives.

As further security against unforeseen developments or emergencies that might arise, three-quarters of the state legislatures — upon the application of two-thirds of both houses of Congress — could grant one-year exceptions to the amendment's spending limits for any reason whatsoever, and could re-issue such exceptions as often as they deemed appropriate. If there is truly a reason why the federal government must spend more money, then three-quarters of the states will likely concur. It is hard to imagine, for instance, more than one-quarter of the states objecting to extra funding for the Gulf Coast in the aftermath of Hurricane Katrina, or to help Lower Manhattan recover from the attacks of September 11th.

By the same token, however, requiring broad approval from the states for such emergency funding would also likely impose useful constraints. If the money appropriated for such aid is limited to what three-quarters of the states will authorize, rather than drawn from an endless federal slush fund (as is the practice today), government authorities (federal, state, and local) will have much more incentive to ensure that recovery work and spending are done efficiently, and to root out expensive fraud and waste — both of which were problems in the aftermaths of Katrina and September 11th.

The provision requiring a two-thirds congressional majority for spending exceptions, meanwhile, provides an important protection against federal extortion of the states. For instance, it is easy to imagine a scenario in which Congress might try to make federal grants to the states — such as the massive amount of funding tied to Medicaid — part of an exceptions-spending provision, rather than funding these programs through the regular budget. With almost every state thoroughly dependent on federal money, most states would simply have to approve the exceptions measure — regardless of whether they approved of all the spending provisions contained therein — simply to preserve their own fiscal solvency. But by requiring two-thirds of the members of Congress to risk their jobs by supporting such shenanigans, the amendment significantly reduces the appeal of federal schemes plotted at the states' expense.

The use of an inflation-adjusted limit, too, offers advantages. First, it would tie the growth of government to real spending power, rather than to economic growth. Attempts by government, through the Treasury and Federal Reserve, to influence the inflation rate itself (in order to permit more government spending) would thus prove futile, since they would only reduce the purchasing power of the additional spending. Second, the level of permitted spending would likely increase faster in tough economic times (when inflation tends to be higher, while economic growth is lower) and more slowly in good times — allowing for countercyclical fiscal policy within reasonable bounds. And because the amendment places limits on the definition of inflation, it would allow for changes in economic thinking to be reflected in economic policy — but would still prevent policymakers from playing fast and loose with terms to a degree that would make the inflation-adjusted cap on spending meaningless.

Among the amendment's greatest benefits, however, are its provisions for enforcement. For one thing, it sets Congress and the president against each other as checks: The president cannot unilaterally violate the amendment, because he doesn't control the purse; Congress cannot unilaterally violate it either, because it is the president — not Congress — who actually carries out government's spending. Furthermore, the amendment turns the American people into an enforcement mechanism, as they would be able to vote out lawmakers who violated the terms of the amendment. Election Day would thus become both a punishment for and deterrent against politicians' engaging in such lawlessness.

[Body-by-Guinness]

Finally, per section four, every citizen would have the standing to sue in order to ensure the amendment's enforcement. This provision is intended to prevent a situation in which the president and Congress have colluded to violate this new section of the Constitution and yet no citizen — or only a very few citizens — can demonstrate enough direct ill effects to establish standing to sue in federal court. By having the language of the Constitution itself explicitly grant every American this standing, the amendment makes it easier for any citizen to challenge the laws that fund annual budgets if these measures violate the amendment — and so make it easier for the judiciary to strike down such laws as unconstitutional.

CHECKS AND BALANCES

Like all constitutional modifications, the Limited Government Amendment could be proposed either by Congress or through a convention called upon the application of two-thirds of state legislatures. Given the nature of this amendment, the state legislatures would almost certainly need to be the originating source. But Congress might ultimately be coaxed into action: If the American people could persuade anything approaching two-thirds of state legislatures to advance this idea, then Congress might prefer to propose the amendment itself, rather than inviting a convention to do so.

It is true that the constitutionally sanctioned process of having state legislatures call a convention to propose an amendment has never been utilized. One possible reason for inaction in this vein has been the theoretical possibility of a runaway convention; in light of the very real and pressing dangers that we already face to our liberty and solvency, however, such potential concerns are comparatively trivial. Besides, there are two reliable checks against potential mischief.

First, the state legislatures could legally constrain their respective convention delegates to vote only on this particular amendment. This measure would be similar to many states' current policies that legally bind their Electoral College delegates to vote for the candidate who receives the largest share of the state's popular vote. If even a significant minority of states were to undertake this precaution, it is unlikely that any other potential amendments could achieve the majority support they would need to be formally proposed.

Second, if any other potential amendments were to be officially proposed, they would still have to be ratified by three-quarters of the state legislatures or by conventions in three-quarters of the states — whichever Congress preferred — to have any legal effect. Such a supermajority requirement is unlikely to be met by ill-advised proposals.

It should be no surprise that this second check is in place. The founders, after all, knew what they were doing. And they presumably would not have empowered state legislatures to call a subsequent convention to propose a constitutional amendment if they had thought this provision would subvert the work they were in the midst of completing at Independence Hall.

THE RIGHT AMENDMENT

Frustration with federal excess has spawned other constitutional-amendment proposals in recent years. Most noteworthy are a Term Limits Amendment, a Balanced Budget Amendment, and Georgetown law professor Randy Barnett's recent proposals for a Federalism Amendment. Each of these proposals represents an attempt to rein in excesses of federal power, and each has its merits — but each addresses something other than the real problem. In expelling many of the shameless spendthrifts who populate Capitol Hill, a Term Limits Amendment would also remove from office many good, cost-conscious members of Congress; the mix would by no means be guaranteed to improve. A Balanced Budget Amendment, meanwhile, would limit deficits but not necessarily spending; it might only succeed in causing taxes to be raised to European levels.

Barnett's Federalism Amendment would repeal the 16th Amendment and severely curtail the federal government's ability to interfere in states' policies and activities. In addition to being a somewhat immoderate proposal, calling for federal judges or supermajorities of states to rein in the federal government seems overly optimistic. Judges have consistently shown their willingness to apply tortured readings of the Constitution to avoid checking Congress. And state governments are often nearly as bloated and profligate as the federal government, run by representatives too similar to their free-spending counterparts in Washington.

The only other direct option for constricting government would be to place limits on government's funding source. But at a time when America owes $13 trillion, cutting off revenue would be unwise. Besides, as our Congress has consistently shown, it doesn't have to have money to spend it. Furthermore, over time, if our government's ability to spend becomes limited, its appetite for taxation will be limited, too: After all, taxing and spending isn't much fun without the latter part. So the real problem is excessive spending, and that is what we must stop.

Obviously, an amendment to constrain the growth of spending would not have an easy time getting enacted. It would require a protracted effort, and it would face long odds. But it is worth remembering that most other constitutional amendments did at some point, too — not to mention the Constitution itself.

A further advantage of the Limited Government Amendment over other recent proposals is that it is designed to generate constructive debate in the course of that enactment struggle. The amendment's advocates would not need to argue against government as such — or even against the need for modest expansions of government's activities over time — but simply for some prudent limits. Its opponents, meanwhile, would have to make the case not only for allowing government to expand, but for allowing it to expand without limit. Such a debate would be enormously clarifying for the country. It could also have the added benefit of inspiring similar amendments to state constitutions. At a time when many states are awash in red ink and some even teeter on the brink of bankruptcy, such proposals might prove of great use to cost-conscious governors and legislators (not to mention state taxpayers), and offer a useful proving ground for the national-level amendment.

Above all, both as a proposal and as a ratified amendment to our Constitution, the Limited Government Amendment would focus the country on the right issue: the question of spending. With spending comes regulation; with spending comes taxation; with spending comes the consolidation of power. The danger inherent in such consolidation was already evident to Alexis de Tocqueville back in the 1830s, when he warned against it in Democracy in America. To Tocqueville, the surest way to undermine people's incentive and ability to actively govern themselves was to consolidate money and power in a centralized government. Government action, he believed, would then increasingly take the place of free human action and interaction, leading to a scenario in which, as he put it,

the sovereign extends its arms over society as a whole; it covers its surface with a network of small, complicated, painstaking, uniform rules through which the most original minds and the most vigorous souls cannot clear a way to surpass the crowd; it does not break wills, but it softens them, bends them, and directs them; it rarely forces one to act, but it constantly opposes itself to one's acting; it does not destroy, it prevents things from being born; it does not tyrannize, it hinders, compromises, enervates, extinguishes, dazes, and finally reduces each nation to being nothing more than a herd of timid and industrious animals of which the government is the shepherd.

But in the wake of this stunningly prescient description, Tocqueville also offered encouragement and advice on how we should proceed. He wrote that the "perils" he described are not "insurmountable," and that our instincts to combat them "will always be found because they come from the foundation of the [democratic] social state, which will not change. For a long time," he added, this "will keep any despotism from being able to settle in, and [it] will furnish new arms to each new generation that wants to struggle in favor of men's freedom."

It would appear that the time has come for this generation's struggle to reclaim some of America's lost freedoms. The majority of Americans have reached the limits of their tolerance for obtrusive centralized power — and, as is evident in the Tea Parties and other popular appeals to the early days of the republic, many are eager to restore the founders' vision.

Still, there are some who, though alarmed by the unbridled expansion of government, might be reticent about championing a Limited Government Amendment. For them, a thought experiment is in order. Suppose that everything falls into place for the repeal of Obamacare, the greatest immediate threat to limited government in our day. Suppose opponents of that entitlement, most of them Republicans, take the House in 2010. They also take the Senate in 2010 or 2012, by a significant (but likely not filibuster-proof) majority. They win the White House in 2012. With President Obama himself having been removed from office, supporters of Obamacare read the clear writing on the wall and don't dare to filibuster in the Senate. Opponents subsequently pass a law in January 2013 to repeal Obamacare, thereby removing that scourge to liberty and fiscal solvency from the books. Celebrations ensue, and a great victory for American ideals and limited government has been won.

Then what?

AN ESSENTIAL REVISION

It is our duty as American citizens to keep vigil over our Constitution, strengthening and maintaining it, rather than blithely expecting it to maintain itself. Thomas Jefferson warned against those who would refuse to tend to our founding documents, writing: "Some men look at constitutions with sanctimonious reverence and deem them like the ark of the covenant, too sacred to be touched. They ascribe to the men of the preceding age a wisdom more than human and suppose what they did to be beyond amendment." And President George Washington, in his farewell address, shared with his fellow citizens his fondest hopes that "the free Constitution, which is the work of your hands, may be sacredly maintained — that its administration in every department may be stamped with Wisdom and Virtue." He certainly did not think that the document would maintain itself.

Our forefathers wrote and ratified our Constitution to include an amendment process, so that if a correction, or recalibration, were needed, we could provide it. Adapting the Constitution to the concerns of the day doesn't mean allowing judges to mold the document into a vehicle to impose their will: That is lawlessness. Rather, it means that the Constitution can be changed, through the proper legal process, by the American people.

We find ourselves in a moment at which the freedoms our forefathers intended for us are endangered by the very government meant to secure those freedoms. Were the founders here today, they would almost certainly urge Americans to take action to avoid the pitfalls of "public debt," excessive taxation, and the "wretchedness and oppression" that follow — let alone to combat the dangers that an overbearing government poses to our civic fabric and way of life. The best way to take up that call is through the Limited Government Amendment. And given the urgency of America's predicament, the best time to advance it is now.

Jeffrey H. Anderson is director of the Benjamin Rush Society, which promotes lower costs and increased access to health care through greater competition and choice.

http://nationalaffairs.com/publications/detail/a-limited-government-amendment

[G M]

Sounds good to me.

[DougMacG]

“The single most important contributor to a nation’s economic growth is the number of startups that grow to a billion dollars in revenue within 20 years.”

The U.S. economy, given its large size, needs to spawn something like 75 to 125 billion-dollar babies per year to feed the country’s post World War II rate of growth. Faster growth requires even more successful startups.

http://blogs.forbes.com/richkarlgaard/2010/10/20/what-grows-an-economy/?boxes=opinionschanneleditors

[Body-by-Guinness]

Interesting new ad:

[youtube]http://www.youtube.com/watch?v=OTSQozWP-rM&feature=player_embedded[/youtube]

[G M]

BBG, can you post a link? I'm not seeing what you posted.

[Body-by-Guinness]

http://www.youtube.com/watch?v=OTSQozWP-rM&feature=player_embedded

[G M]

Good thing you don't work for NPR. I'm sure that's hate speech too..... 

This should be on constant rotation on prime time tv.

[G M]

http://www.telegraph.co.uk/finance/economics/6584906/China-turns-to-Adam-Smith.html

Smith’s first masterpiece, the Theory of Moral Sentiments, has been translated into Chinese for the first time, and Chris Berry, professor at Glasgow University, where Smith wrote the book, will next week deliver lectures on it at Fudan University in Shanghai.

China’s Premier, Wen Jiabao, has said he often carries the work – which preceded his more famous work The Wealth of Nations – in his suitcase when he goes abroad. Prof Berry said the earlier book emphasised the importance “not only [of] their material prosperity but also their moral welfare”.

**Anyone think Barry-O will flip through a chapter or two between golf sessions? Me either.**

[Body-by-Guinness]

This should be on constant rotation on prime time tv.

Rumor has it there's a million dollar ad buy that'll be showing in toss up districts.

[G M]

http://www.npr.org/templates/story/story.php?storyId=124740579

Hemmed in by mountains and the sea, Wenzhou’s land shortage forced its inhabitants into trade. Now, it’s China’s capital of capitalism. Ninety-nine percent of all business in the city is private sector, according to Wenzhou government statistics.

And those entrepreneurs have been phenomenally successful: Last year, one in every three Chinese tourists overseas was from Wenzhou and one-tenth of China’s luxury cars ended up in this city of 8 million.

Nowhere is the Wenzhou love of making money — and flaunting it — more apparent than the city’s only Louis Vuitton store. As soft Muzak chimes in the background, brand-conscious shoppers finger the $300 key rings and ogle the leather bags.

“We all like LV (Louis Vuitton) for bags, since everyone knows this brand,” says a man who identifies himself as Mr. Wu. He does a quick inventory of his wardrobe: bag by Louis Vuitton, shoes by Gucci, stripy cotton sweater by Paul & Shark with a $600 price tag. “Very expensive, but it’s worth it,” he adds, beaming in a self-satisfied manner.

Mrs. Jin is more sniffy about Louis Vuitton. “It’s too vulgar nowadays,” she says dismissively. “The streets are awash with it. I prefer Chanel, it’s more elegant.”
Millionaire

Chen Wenda started a lighter-parts factory at age 18. Two decades later, the millionaire owns a shoe factory, a wine business, real estate interests and a soccer team. He started the wine business to appeal to the brash, high-rolling millionaires of Wenzhou, where Chen says people like to flaunt their wealth more than in any other place in China.

Diversify, Diversify, Diversify

One 30-something millionaire, Chen Wenda, is aiming to cash in on the famed Wenzhou flashiness with his wine cellar stuffed full of Chateau Lafite and Petrus.

His trajectory follows a typical Wenzhou path. In 1988, at age 18, he started a lighter-part factory. Then he diversified. Now he has a shoe factory, an import-export business, a wine business, real-estate interests, and for the past two years, his own personal soccer team, which costs him half-a-million dollars a year. He describes the Wenzhou way of making money.

“I set up businesses and drop those that don’t make money, like the lighter-part factory. No one puts their eggs in one basket,” he explains.

“In Wenzhou, every single person does real estate. Everyone is pushing up the prices of buildings. We dare to do stuff. We’re not scared. And everyone wants to be their own boss,” he says.

These days, one in every ten bottles of wine drunk in China is guzzled in Wenzhou, as an accompaniment to deal-making. But Chen says the businessmen here are too busy making money to bother with the niceties of wine drinking.

“If they think that wine is too sour, they might add Coke to make it go down smoothly. If that’s what they want to do, that’s fine,” he adds. “I don’t see the need to emphasize European wine culture. Wenzhou people are too busy to do all of that. They have to meet people and do business.”

[G M]

http://hotair.com/greenroom/archives/2010/10/24/how-george-w-bush-destroyed-the-economy-in-only-eight-short-years/

How Bush Destroyed the Economy In Only Eight Short Years
posted at 2:50 pm on October 24, 2010 by directorblue
[ Economics ]   

The conventional wisdom among the denizens of the left is that George W. Bush took a surplus and destroyed the economy in only eight short years. The following illustrated story shows just how he pulled off this difficult task.

[Crafty_Dog]

I was aware of the points made here.  Convenient to have the facts in one place.  I've just forwarded this in search of moving some people's understanding forward.

[Body-by-Guinness]

Amusing little video:

http://www.ij.org/about/3554

[Crafty_Dog]

Its from POTH, so caveat lector:

DETROIT — When executives from General Motors begin pitching its public stock offering to investors this week, they will extol the company’s financial turnaround, its snazzy new car lineup led by the plug-in Chevrolet Volt, and its growing operations in China and other international markets.

Ron Bloom, the administration’s point man in dealing with G.M., has kept in close touch with the top company executives.
Absent from the pitch? The extraordinary role that the federal government has played in fixing the nation’s biggest automaker.

While the government’s $50 billion bailout last year saved G.M. from liquidation, the Obama administration has taken great pains to distance itself from any appearance of running the company. Even a hint of government meddling, administration officials say, could have a negative effect on the value of the American taxpayers’ stake in a publicly traded company.

Yet interviews with G.M. and federal officials show decisions by the government have played a pivotal role in shaping the automaker’s leadership, its business strategies, and now its initial stock offering, which will raise an estimated $10.6 billion at the same time that it reduces the taxpayers’ stake in the company from 61 percent to below 40 percent.

People familiar with the contact between G.M. and the Treasury Department say Ron Bloom, a senior adviser to the Treasury secretary Timothy F. Geithner, is told about actions that G.M. management and the board are contemplating before they occur.

In April, for example, Edward E. Whitacre Jr., the chairman of the G.M. board who also served until recently as its chief executive, discussed a number of possible moves at a meeting in Washington with Mr. Geithner and Mr. Bloom, including G.M.’s plan to buy a finance company.

Similarly, Mr. Bloom was informed beforehand of Mr. Whitacre’s decision to resign as chief executive and the board’s decision to name Daniel F. Akerson — who was one of the government’s hand-picked directors — to succeed him.

Large private investors, like Kirk Kerkorian or Warren E. Buffett, rarely involve themselves in the day-to-day running of companies they hold major stakes in. Instead, they tend to recommend broad strategic parameters and appoint directors to oversee the execution. The Obama administration has taken a similar tack with G.M., the interviews show.

To ensure a fresh start for the company, the government chose a new chairman and several new directors for its board, which in turn picked two of its members to serve as successive chiefs of the company.

The government also set parameters for G.M.’s strategic direction — fewer brands and models, a leaner organization, and a sweeping overhaul of its plodding corporate culture.

And now the government is playing an integral role in the stock sale by deciding how many of its 304 million shares it will sell off and at what price.

“The government has not abdicated control, they have exercised it through the board of directors,” said M. P. Narayanan, a finance professor at the University of Michigan. “If you own 60 percent of the company, you set the direction and let your board carry it out.”

Publicly, the Treasury Department has taken a hands-off approach to current management at G.M. and says it is eager to sell off its shares as soon as possible. It has been a delicate balancing act; while the government avoids direct involvement in decisions at G.M., it still requires management to keep it informed of any major move.

“Demonstrating our discipline on two fronts is integral to protecting the American taxpayer,” said Brian Deese, a member of the president’s auto task force that shepherded G.M. through bankruptcy. “One is letting G.M. make its own decisions and run the business. The other is making good on our commitment to exit as quickly as practicable.”

The point man for the Obama administration has been Mr. Bloom, a central member of the auto task force. Since G.M.’s emergence from bankruptcy in July 2009, Mr. Bloom has kept in regular contact with Mr. Whitacre and Mr. Akerson, who succeeded Mr. Whitacre as chief executive in September.

Otherwise, the revamped board has carried out much of the agenda that the administration’s task force laid out for G.M. after bankruptcy. With Mr. Whitacre taking the lead role, the board hired a new chief financial officer and replaced a number of longtime G.M. executives with younger people and outside hires.

“The government wanted to see new faces in senior management, and the board took care of that,” said David Cole, a founder of the Center for Automotive Research in Ann Arbor, Mich.

Mr. Cole, whose father was once the president of G.M., said the government had “behaved prudently” in allowing the new management team sufficient latitude to make day-to-day business decisions.

“It’s certainly easier for the administration to take that point of view given how G.M. has performed,” he said. “They can afford to stay out of the details because the company is making money again and is positioned well in the marketplace.”

G.M. was profitable in the first six months of this year, and is expected to report a third-quarter profit as well. The company is also investing in new products, adding jobs, and making moves to cut its debt and fund pension obligations in advance of the stock offering.

The Treasury Department has taken a more direct role in influencing the stock sale at G.M.

Regarding the size of the offering, Washington has been somewhat at odds with G.M. and the Wall Street underwriters.

Whereas G.M. and its bankers wanted the largest offering possible, the Treasury was more interested in getting the best price for the taxpayers’ shares. The government ultimately agreed to sell about one-third of its holdings for a price ranging from $26 to $29 a share after a three-for-one stock split, which it hoped would give the stock room to appreciate in value and bring bigger returns on future divesting.

Mr. Whitacre said in August that he hoped the government would sell all of its shares in the offering and remove the “government motors” label for good.

But that notion ran counter to the Treasury’s goals, and G.M. abruptly stopped commenting on what the government might do with its shares. Even with a sale of a third of its stock, the government will still be the largest shareholder in G.M. for some time to come, perhaps years.

[Crafty_Dog]

second post of the morning

http://online.wsj.com/article/SB10001424052748704462704575590642149103202.html

By RANDALL SMITH and SHARON TERLEP
General Motors Co. will drive away from its U.S.-government-financed restructuring with a final gift in its trunk: a tax break that could be worth as much as $45 billion.

GM, which plans to begin promoting its relisting on the stock exchange to investors this week, wiped out billions of dollars in debt, laid off thousands of employees and jettisoned money-losing brands during its U.S.-funded reorganization last year.

Now it turns out, according to documents filed with federal regulators, the revamping left the car maker with another boost as it prepares to return to the stock market. It won't have to pay $45.4 billion in taxes on future profits.

The tax benefit stems from so-called tax-loss carry-forwards and other provisions, which allow companies to use losses in prior years and costs related to pensions and other expenses to shield profits from U.S. taxes for up to 20 years. In GM's case, the losses stem from years prior to when GM entered bankruptcy.

Usually, companies that undergo a significant change in ownership risk having major restrictions put on their tax benefits. The U.S. bailout of GM, in which the Treasury took a 61% stake in the company, ordinarily would have resulted in GM having such limits put on its tax benefits, according to tax experts.

But the federal government, in a little-noticed ruling last year, decided that companies that received U.S. bailout money under the Troubled Asset Relief Program won't fall under that rule.

 Neal Boudette discusses GM's IPO plans, which will raise up to $10 billion and cut the government's stake to below 50%.
."The Internal Revenue Service has decided that the government's involvement with these companies, both its acquisitions plus its disposals of their stock, means they should be exempt" from the rule, said Robert Willens, a New York tax consultant who advises investment banks and hedge funds.

The government's rationale, said people familiar with the situation, is that the profit-shielding tax credit makes the bailed-out companies more attractive to investors, and that the value of the benefit is greater than the lost tax payments, especially since the tax payments would not exist if the companies fail.

GM declined to comment.

The $45.4 billion in future tax savings consist of $18.9 billion in carry-forwards based on past losses, according to GM's pre-IPO public disclosure. The other tax savings are related to costs such as pensions and other post-retirement benefits, and property, plants and equipment.

GM may avoid paying up to $45 billion in taxes for up to 20 years, according to people familiar with the situation. Above,GM's Cadillac logo is displayed on the grill of a Cadillac SRX.
.The losses were incurred by "Old GM," the company that remained in bankruptcy after the current "New GM" resulted from the reorganization last June.


.Investors typically view tax-loss carry-forwards losses as important assets in bolstering a company's balance sheet.

GM's chief domestic rival, Ford Motor Co., last year adopted a plan to preserve deferred "tax assets" which stood at $17 billion at the end of 2009. Ford can use the tax attributes in certain circumstances to reduce its federal tax liability. Ford declined to comment on the GM tax ruling.

Write to Randall Smith at randall.smith@wsj.com and Sharon Terlep at sharon.terlep@wsj.com

[Body-by-Guinness]

Various links in the original piece to proposal to cut .25 to .50 trillion dollars from the US budget.

What Spending Should the GOP Cut?

Posted by Chris Edwards

Congratulations to the wave of Republicans who successfully ran on promises to tackle rising government debt and cut the hugely bloated federal budget. On the campaign trail, most candidates were not very specific about how they would cut the budget, but when they come to Washington they will be looking for good reform targets.

Newcomers to Congress can find a wealth of budget-cutting ideas in recent plans by various D.C. think tanks:

At the Heritage Foundation, Brian Riedl has come up with $343 billion in proposed annual cuts.
At the Committee for a Responsible Federal Budget, Bill Galston and Maya MacGuineas have proposed $400 billion in annual cuts.
Esquire magazine assembled four former senators who came up with $476 billion in annual cuts.
The National Taxpayers Union teamed up with the U.S. Public Interest Research Group to propose $600 billion of cuts over five years.
Michael Ettlinger and Michael Linden of the Center for American Progress offer one plan that would cut annual spending by $255 billion.
Cato’s website, www.downsizinggovernment.org, also provides a treasure trove of spending cuts, and I will be publishing a detailed budget-reform plan in coming days.

Some of the above budget plans include tax increases, but voters gave a resounding message yesterday that they want Congress to focus on cutting spending, not raising taxes.

Out of the starting gate next year, fiscal reformers in Congress should push for an across-the-board cut to discretionary spending for the rest of the current fiscal year. One approach would be for House leaders to propose a continuing resolution that extends spending at last year’s levels, less some substantial percentage cut applied to every program.

For the upcoming fiscal year of 2012, reformers need to carefully target some major program cuts and eliminations. The president and the Democrats in the Senate will likely resist proposed cuts, but the point is to further the national debate that has begun about the proper size and scope of the federal government.

Some initial targets for GOP reformers, with rough annual savings, could include: community development subsidies ($15 billion), public housing subsidies ($9 billion), urban transit subsidies ($9 billion), and foreign development aid ($18 billion). On the entitlement side, initial cuts could include raising the retirement age for Social Security and introducing progressive price indexing to reduce the growth rate of future benefits.

We will not get federal spending under control unless we begin a national discussion about specific cuts. And we won’t get that discussion unless enough members of Congress start pushing for specific cuts. Ronald Reagan was able to make substantial cuts to state grants in the early 1980s because policymakers had discussed such reforms throughout the 1970s. Republicans in the mid-1990s were able to reform welfare because of the extended debate on the issue that preceded it.

The electorate wants spending cuts, and they will support the policymakers who take the lead on cuts if they are pursued in a forthright and serious-minded manner.

http://www.cato-at-liberty.org/what-spending-should-the-gop-cut/

[DougMacG]

This WSJ editorial is dated Sept 20 2010.  The topic is timeless.  I apologize if already posted.  We need economic growth not equality.  In good times I think people take growth for granted and have time to focus/whine about inequality. 
-------------
http://online.wsj.com/article/SB10001424052748703440604575495933472536928.html

Wealth and Poverty
How's that inequality thing working out?

If there is a single unifying principle behind the Democratic agenda of the last two years, it is this: Reduce income inequality. So yesterday's annual Census Bureau review of American incomes is a kind of progress report on how this agenda is working out. In a word, our wealth isn't spread any more equitably, though more of us are poor.

The Current Population Survey shows that in 2009 the poverty rate climbed to 14.3% from 13.2% in 2008—the highest since 1994. That figure translates into 43.6 million Americans living below the poverty line, the largest absolute number in the half-century for which comparable data are available. At $49,777, the real median household income fell slightly, though not in a statistically significant way. It declined 1.8% among families and rose 1.6% for individuals.

In a statement yesterday, President Obama attributed these results to the financial panic and recession, and that's true in part. The Census data also overstate the true level of poverty because they don't include noncash government payments like housing subsidies, food stamps, the earned income tax credit or entitlements like Medicaid.

But then Mr. Obama couldn't resist adding that "Even before the recession hit, middle class incomes had been stagnant and the number of people living in poverty in America was unacceptably high, and today's numbers make it clear that our work is just beginning." So to address the rising poverty on his watch, the President wants to plow ahead with the same policies that aren't reducing poverty.

We draw a different lesson, which is the continuing imperative of rapid economic growth. Census Bureau figures over the last 50 years show that poverty falls most rapidly during times of the most sustained growth—the 1960s, 1980s and second half of the 1990s. The poverty rate also fell in the mid-2000s before heading up again when the recession hit. The most important goal of economic policy should be to increase society's overall wealth. This helps the poor and everybody else.

Yet starting with his first budget proposal, Mr. Obama has made clear that his main policy purpose is reducing inequality. As the White House budget scribes put it, "There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few. . . . It's a legacy of irresponsibility, and it is our duty to change it."

Thus the 2009 stimulus was assembled around social programs and redistribution, defying even Keynesian precepts about immediate job creation. Among its many other goals, ObamaCare is intended to produce "a leveling" of the "maldistribution of income in America," as Senate Finance Chairman and chief author Max Baucus put it. Even now, amid a mediocre recovery and 9.6% unemployment, the inequality imperative is driving Democrats to insist on a huge tax increase—no matter the impact on growth.

The irony is that, while there has been a modest widening of the income gap in recent decades, the Census (as measured by the "Gini index") shows that inequality has remained mostly unchanged since the early 1990s—regardless of which party is in power. The reasons are many and rooted in larger economic and social forces that can't be fixed with higher taxes and White House social engineering.

More important, this preoccupation with inequality is actively harmful because it leads to economic policies that inhibit growth. That's the real warning in the new Census data. Democrats are succeeding in their goal of punishing business and the wealthy, but to the extent that this has produced anemic growth it is also punishing the poor and middle class.

The moral claim of Obamanomics is that it ensures that everyone pays his "fair share," but its early returns show this agenda is producing more poverty. In their obsession with income shares and how many people have how much wealth, the Obama Democrats are imposing policies that ensure only that there will be less wealth for everyone to spread around.

[JDN]

Spreading the wealth

The gap between rich and poor in the U.S. is bigger than at any time since the 1920s. Is that really what most Americans want?

By Michael I. Norton and Dan Ariely

November 8, 2010

The gap between the wealthiest Americans and the poorest is bigger than at any time since the 1920s — just before the Depression. According to an analysis this year by Edward Wolff of New York University, the top 20% of wealthy individuals own about 85% of the wealth, while the bottom 40% own very near 0%. Many in that bottom 40% not only have no assets, they have negative net wealth.

A gap this pronounced raises the politically divisive question of whether there is a need for wealth redistribution in the United States. This central question underlies such hot-button issues as whether the Bush tax cuts should be allowed to expire and whether the government should provide more assistance to the poor. But before those issues can be addressed, it's important to understand how Americans feel about the country's increasing economic polarity.

We recently asked a representative sample of more than 5,000 Americans (young and old, men and women, rich and poor, liberal and conservative) to answer two questions. They first were asked to estimate the current level of wealth inequality in the United States, and then they were asked about what they saw as an ideal level of wealth inequality.

In our survey, Americans drastically underestimated the current gap between the very rich and the poor. The typical respondent believed that the top 20% of Americans owned 60% of the wealth, and the bottom 40% owned 10%. They knew, in other words, that wealth in the United States was not distributed equally, but were unaware of just how unequal that distribution was.

When we asked respondents to tell us what their ideal distribution of wealth was, things got even more interesting: Americans wanted the top 20% to own just over 30% of the wealth, and the bottom 40% to own about 25%. They still wanted the rich to be richer than the poor, but they wanted the disparity to be much less extreme.

But was there consensus among Americans about their ideal country? Importantly, the answer was an unequivocal "yes." While liberals and the poor favored slightly more equal distributions than conservatives and the wealthy, a large majority of every group we surveyed — from the poorest to the richest, from the most conservative to the most liberal — agreed that the current level of wealth inequality was too high and wanted a more equitable distribution of wealth. In fact, Americans reported wanting to live in a country that looks more like Sweden than the United States.

So, if Americans say they want a country that is more equal than they believe it to be, and they believe that the country is more equal than it actually is, the question becomes how we lessen these disparities. Our survey didn't ask what measures people would be willing to support to address the wealth gap. But to achieve the ideal spelled out by those surveyed, about 50% of the total wealth in the United States would have to be taken from the top 20% and distributed to the remaining 80%.

Few people would argue for an immediate redistribution of 50% of the nation's wealth, and such a move would unquestionably create chaos. In addition, despite the fact that individual Americans give large amounts to charitable causes each year — in effect, a way of transferring wealth from the rich to the poor — the notion of government redistribution raises hackles among many constituencies.

Despite these reservations, our results suggest that policies that increase inequality — those that favor the wealthy, say, or that place a greater burden on the poor — are unlikely to reflect the desires of Americans from across the political and economic spectrum. Rather, they seem to favor policies that involve taking from the rich and giving to the poor.

Michael I. Norton is an associate professor of business administration at the Harvard Business School; Dan Ariely is the James B. Duke Professor of Behavioral Economics at Duke University and the author of "The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home."

[DougMacG]

"Spreading the wealth - The gap between rich and poor"

JDN, Following rant not aimed at you.  From what I can see your post agrees with my view.  Historic efforts to spread wealth just made everything worse.

We have now found 2 ways to worsen the gap.  Income inequality, we know, widens in a freely growing economy.  And now we know income inequality also grows when we throw the brakes on and try to even things up.

My theory in the fall of 2008 was that inequality would drop during a crash because the invested class was losing wealth while the lower income/wealth groups just kept plugging away at their paycheck to paycheck struggles, with constant income.  Not true.

Capital employs labor.  9.6% unemployment isn't the half of it.  Real unemployment in some areas is closer to 20%.  You can't have an all-out frontal assault on key groups that you share an economy with including employers, investors, potential employers and your largest customers and suppliers and then scratch your head wondering what happened to your own income.

The whole point of measuring inequality is a chase down the wrong street.  IT IS NONE OF OUR BUSINESS WHAT SOMEONE ELSE MAKES legally and pays proper taxes on (IMHO).  What the hell ever happened to a right of privacy.

"When we asked respondents to tell us what their ideal distribution of wealth was, things got even more interesting: Americans wanted the top 20% to own just over 30% of the wealth, and the bottom 40% to own about 25%. They still wanted the rich to be richer than the poor, but they wanted the disparity to be much less extreme."

This sounds like a Jaywalking question or from that Canadian video explaining that Canadian hours and and minutes need to be converted into American time.

Income disparity is a fact, and it is irrelevant because you can join in or climb to any level that you want or deserve.  The questions that should be asked are things like: Are their unfair barriers to entry in investment banking and other lucrative professions? Are there public infusions of money going into colleges, medicine or other industries that skew the costs artificially upward beyond what their customers can afford to pay?  Are public servants paid on a scale and structure equal and competitive to a private free market? Are people discriminated in employment or investment for wrongful reasons? Are there laws and taxes that unreasonably keep people from unleashing their entrepreneurial potential?

This is a land of opportunity, not outcome.  When we focus on outcomes, we end up screwing up opportunity, and outcomes, IMHO.

The more people that are rich around you, the better your opportunities to advance as well, but it doesn't all move together in lock-step.  Focus on economic opportunity and tear down the barriers.

The best and simplest description I have read about how to grow the economy is this: We need to start in this country at least 125 new companies EVERY YEAR that will grow to a billion dollars in revenue within 20 years. http://blogs.forbes.com/richkarlgaard/2010/10/20/what-grows-an-economy/?boxes=opinionschanneleditors

To do that we probably need to start hundreds of thousands of other businesses that don't go quite as far but provide a good living and market value for the services of the people who work there.

People can play any role in this that they want.  Inventor, banker, human resources, customer service, front desk, warehouse, sales, marketing, supplier, customer, you name it.  But the jobs won't all pay the same; each needs to be competitive, and if you are taking shares instead of pay in a start up you might be measured as poor today when in fact you are not.

In a market, your services are worth what the second highest bidder is willing to pay.

Crafty's post elsewhere of the top 10% of Cubans coming to Florida in the 1950s brought a flashback to me of a Cuban American I knew in business past who had been a founder of the Intel memory systems division in the late 1960s.  I will bet that few people in or outside of their group knew then the future impact of what they were doing or what wealth and jobs it would create.  They just needed to believe in their own ideas and their own capbilities - in an environment with the freedom to unleash it.  What is the proper worth of his contribution?  I have no idea.  Let a free market decide.  What were the odds of any of that happening if he had stayed in a government enforced, equal society?  Zero.

[Crafty_Dog]

There is a reason that one of God's TEN BIG RULES is "Thou shalt not covet thy neighbor's stuff"-- it is precisely because of how easy it is to feel envy and how pernicious the consequences of that envy are.  Our Founding Fathers knew this.  It is, in essence, why we are a Constitutional Republic and not a democracy.

When I ran for Congress I would tell a parable as a story: "My friend an I were eating at a restaurant.  Three people at a neighboring table finished and received their bill.  They got up to leave and handed it to us and said "This is a democracy.  There are three of us and two of you.  We had a vote.  You're paying."

Separate point:   As the Reagan tax rate cuts kicked in, the chattering classes began blathering about a massive increase in the concentration of wealth.    What these economic illiterates did not comprehend was that under the 70% top rate regime, wealth hid in tax shelters.  At the 30% rate most of the the shelters ceased making sense and the rich folks who invested in them decided to allow their income/profits/gains to be exposed to taxation.   Result?  Data showing a huge spike in the number of the rich and a dramatic increase in the concentration of wealth.

[G M]

Rich people don't take their money and store it in vaults so they can swim through it like Scrooge McDuck. They invest it and spend it, which creates jobs for the non-rich.

[G M]

http://pajamasmedia.com/victordavishanson/stay-worried/?singlepage=true

Economics 101

What worries me about President Obama is really one general issue: his very concrete enjoyment of the good life as evidenced by his golf outings, Martha’s Vineyard vacations, and imperial entourages that accompany him abroad, and yet his obvious distrust of the private sector and the success of the wealthy. Yet my discomfort here is not even one that arises from an obvious hypocrisy of, say, a Michelle on the 2008 campaign trail lecturing the nation about its meanness or her own previous lack of pride in her country, juxtaposed with her taste for the publicly provided rarefied enjoyments of a Costa del Sol hideaway at a time of recession.

No, my worries run deeper. Apparently, the president is unaware that after some 2,500 years of both experience with and abstract thought about Western national economies, we know that a free, private sector increases the general wealth of a nation, while a statist redistributive state results in a general impoverishment of the population. At the root of that truth is simple human nature — that people wish to further their own interest more fervently than the more abstract public good (e.g., why the renter does not wash the rental car, or why the public restroom is treated differently from its counterpart at home), and can be encouraged to invent, create, and discover which in turn helps the less fortunate, lucky, healthy, or talented.

Texas or California?

We all accept, of course, that the question is not one of a laissez-faire, unchecked robber baron arena, versus a Marxist-Leninist closed economy, but rather in a modern Western liberal state the finer line between a Greece and a Switzerland, or a California and a Texas.

In the former examples, the desire to achieve an equality of result through high taxes, generous public employment, and lavish entitlements destroys incentive in two directions — creating dependency on the part of the more numerous recipients of government largess, and despair among the smaller but more productive sector that sees the fruits of its labor redistributed to others — with all the obligatory state rhetoric about greed and social justice that legitimizes such transfers.

In the latter examples, an equality of opportunity allows citizens to create wealth and capital on the assurances that the incentives for personal gain and retention of profits will result in greater riches for all.

Neither Baron nor Insect

We in America more or less understood that dichotomy, and so neither idolized a Bill Gates or Warren Buffett with titles like count, lord, or baron, nor demonized them with revolutionary spite (i.e., “insect,” “enemy of the people,” or even “greedy” and “selfish”). Instead, we assumed that Buffett had enriched his investors and more or less could not possibly use all the vast billions he accumulated (he, in fact, lived rather modestly and much of his treasure will probably end up in the Gates Foundation). One way or another, it was worth having Microsoft Word with the expectation that the zillionaire Bill Gates’ shower is still no hotter than ours, and his private jet goes not much faster than our own cut-rate Southwest Airlines flights. All that seems simple enough — until now.

So, again, what troubles me is that the president seems unaware of this old divide — that what allowed the pre-presidential Obamas, respectively, to make quite a lot of money as a legislator, author, professor, lawyer, or hospital representative was a vibrant private sector that paid taxes on profits that fueled public spending and employment or made possible an affluent literary and legal world. All that was contingent upon the assurance that an individual would have a good chance of making a profit and keeping it in exchange for incurring the risk of hiring employees and buying new equipment.

Grows on Trees?

Instead, Obama seems to think that making money is a casual enterprise, not nearly so difficult as community organizing, and without the intellectual rigor of academia — as if profits leap out of the head of Zeus. I say that not casually or slanderously, but based on the profile of his cabinet appointments, his and his wife’s various speeches relating Barack Obama’s own decision to shun the supposed easy money of corporate America for more noble community service in Chicago, and a series of troubling ad hoc, off-the-cuff revealing statements like the following:

As a state legislator Barack Obama lamented the civil rights movement’s reliance on the court system to ensure equality-of-result social justice rather than working through legislatures, which were the “actual coalition of powers through which you bring about redistributive change.” To Joe Wurzelbacher, he breezily scoffed that “my attitude is that if the economy’s good for folks from the bottom up, it’s gonna be good for everybody. I think when you spread the wealth around, it’s good for everybody.” When Charlie Gibson pressed presidential candidate Obama on his desire to hike capital gains taxes when historically such policies have decreased aggregate federal revenue, a startled Obama insisted that the punitive notion, not the money, was the real issue: “Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness.” And as President Obama, again in an off-handed matter, he suggested that the state might have an interest on what individuals make: “I mean, I do think at a certain point you’ve made enough money.”

In other words, for most of his life Barack Obama has done quite well without understanding how and why American capital is created, and has enjoyed the lifestyle of the elite in the concrete as much as in the abstract he has questioned its foundations. Does he finally see that the threat of borrowing huge amounts to grow government to redistribute income through higher taxes risks greater impoverishment for all of us, despite the perceived “fairness”? That suspicion alone explains why those with trillions of dollars are sitting on the sidelines despite low interest, low inflation, and a rebounding global economy. In short, millions of profit-makers believe not only will it be harder to make a profit, but far less of it will remain their own— and all the while the president will deprecate the efforts of those who simply wish do well for themselves. With proverbial friends like those, who needs enemies?

Until that mindset changes and can be seen by the public to change, the recession will not so easily end.

[G M]

http://taxprof.typepad.com/taxprof_blog/2010/11/sullivan-the-.html

[G M]

http://pajamasmedia.com/blog/avoiding-the-abyss-the-national-economic-rescue-initiative/?singlepage=true

First, the good news: The Congressional midterms, gubernatorial races, and various state and local electoral contests resulted in the large-scale, unmistakable repudiation of the political tax-and-spend culture that so many of us were hoping for.

Now for the bad news: The distance between where we are and a genuine long-term national fiscal and economic recovery is daunting. This is no time for disengagement.

Many Americans have begun to recognize just how deep the short-term and long-term financial holes we face really are. Others, sadly including many politicians who won key races last week and their party overlords, still don’t seem to get it.

The near-term situation is scary enough, and needs to be stabilized soon, or, as I said a month ago, there won’t be a long-term. But even if we satisfactorily resolve the short-term, the long-term problems we face are intimidating at levels most people have only begun to absorb.

Focusing on the short-term for a bit: Fiscal 2010, which ended on September 30, was the second time the U.S. government ran an annual deficit of well over $1 trillion. Fiscal 2009 was the first. As I noted two weeks ago, this year’s real spending deficit was worse than the first. Some departments went hog-wild. Spending at the Department of Education was up 30%. Spending increases at the Energy Department and the EPA (36%) were ridiculous. I could go on and on.

Federal collections on the whole came in barely higher than a year earlier, and were still about 20% lower than fiscal 2008 before subtracting IRS stimulus payments. Tax collections in most categories were down. The only reason receipts increased was that collections from the Federal Reserve increased by $42 billion.

Federal Reserve collections … what’s that all about? It’s about Ben Bernanke performing the 21st century’s equivalent of printing money. The Fed calls it “Quantitative Easing” (QE).

Properly employed, QE can be a stabilizing mechanism to keep an economy from nose-diving and assist it as it recovers. The Fed creates money out of nothing and invests it in government bonds, mortgage-backed securities, and corporate bonds for a while. It is supposed to wind down those investments when condition warrant.

The trouble is that conditions don’t warrant pulling back, because a) there hasn’t been a meaningful recovery, and b) fiscal policy is a scandalous mess. What little economic improvement has occurred has not been enough to put people back to work. Unemployment has been stuck at over 9% for the longest period since the Great Depression.

Because of the deficits created by fiscal policy and the weak recovery that has accompanied it, the Fed can’t pull back on QE without significantly disrupting the economy. We can argue all day and night about whether the pullback should happen, but the fact is that at least for now Bernanke & Co. are determined not to let it happen, even as the administration continues to push for more historically ineffective stimulus and continued trillion-dollar deficits. The Fed has embarked on “QE2,” a second round of quantitative easing that will increase the Fed’s investment portfolio by another $600 billion.

The deeper the QE hole, the harder it will be to dig out, and the worse the consequences will be if — hopefully we catch it in time before it becomes “when” — the American people and foreign governments (not necessarily in that order) come to realize that the house of cards is unsustainable. That’s why government spending must be slashed and the government’s budget must be brought into balance — and soon.

But even if that occurs, there are serious long-term problems. They come in four major areas:

•          Social Security

•          Medicare, Medicaid and Health Care

•          Military

•          All other spending

Social Security’s actuarial deficit was over $7.6 trillion a year ago. The actuarial deficit in Medicare alone is five times as large. As the Baby Boomers continue to retire and age in record numbers, both numbers are moving higher — and quickly.

Sadly, projected spending in the first two categories above threatens to totally wipe out the government’s ability to spend any money in the other two, even though they happen to be the areas where the specifically defined constitutional duties of the federal government (defense, courts, etc.) are carried out.

Today, the PJ Institute, the research and education arm of Pajamas Media, is introducing the National Economic Rescue Initiative (NERI) to the American people. While its timing in the euphoria of the Tea Party wave that has swept the nation is perfect, its overall warning is stark, sobering, and demands action:

    Because of decades of overspending by both Democrats and Republicans, our nation will reach a time (possibly around 2020 or sooner) when we can no longer borrow to finance our annual trillion dollar deficit.

If lenders are no longer willing to buy our debt, we will be unable to continue to fund the government’s operations through borrowing. If spending is not drastically cut, Americans will need to pay taxes at much, much higher levels.

What needs to be done to prevent this will involve much more than a little tweaking. It will require a wholesale rethink of what the government is capable of doing and should be doing — and conversely, what individuals, families, and communities are capable of doing better, and should be doing themselves.

The Congressional Budget Office projects that if we continue on our current course, federal debt owed to the public will increase from $9 trillion today to about $550 trillion a mere 70 years from now — and that’s after inflation, while assuming (many believe naively) that the government will be able to continue to borrow at low, risk-free rates.

We’re not kidding. But if 70 years sounds too far off to be believable, how about these intermediate threshold crossings: $20 trillion in 2022, twelve years from now; $40 trillion in 2032, just ten years later; or $100 trillion in 2046? Keep in mind that our current Gross Domestic Product in current dollars is about $14.7 trillion.

Nobody can possibly believe that our current financial path is sustainable.

This is where those reading this column and the American people come into play. Please, go to the NERI web site and educate yourself. Utilize its tools, and then visit its interactive Solutions Design Center.

If it hasn’t become obvious to readers during the past several years, let’s make it obvious now: The time for the American people to assume that the country’s problems can be solved with minimal citizen involvement has ended. Additionally — and this will be addressed in future NERI subscription-based offerings designed to be extremely beneficial yet very affordable — the idea that people can just “wing it” in their own personal money management, retirement savings, and overall financial planning, or play catchup after years of neglect, is similarly over.

This nation does not have the luxury of blowing this off. Failing to deal with the problem while there is still time will condemn future generations to a standard of living which will be a mere shadow of ours, and which will ultimately threaten our form of government, i.e., whether we will continue to genuinely have government of the people, by the people, for the people.

So go there. Take action. Make suggestions. Encourage others to do the same.

The country you help save will be your own.

[DougMacG]

Dan Henninger at the WSJ has a simpler answer to the economic doldrums than the technical adjustments of 'quantitative easing'.  Stop throwing Molotov cocktails at business.  http://online.wsj.com/article/SB10001424052748703805004575606750168419176.html

[Crafty_Dog]

This is a very different take than much of what is posted around here, but Brian Wesbury is a superb supply side economist with an outstanding record with his predictions.

It's a Self-Sustaining Recovery
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 11/29/2010


In the four months between June and October, retail sales surged 10.2% at an annual rate and are up 7.3% over the past 12 months. Still, consumers get no respect from the majority of analysts and economists, who during the summer and early fall, could not stop talking about a double dip recession.

But instead of going wobbly, consumers seem to be standing strong. ComScore says online sales versus last year were up 28% on Thanksgiving Day, 9% on Black Friday, and 13% so far in November. Coremetrics, another online data gatherer, reports sales from Thanksgiving Day thru Saturday are up 14%. The National Retail Federation (NRF) reported 8.7% more people visited stores this year versus last year and the average shopper spent 6.4% more than a year ago.
 
The only report that was “remotely negative” came from ShopperTrak (and its network of 70,000 US malls) – sales were up 0.3% versus a year ago. However, the ShopperTrak data have a weakness - free-standing big box stores are not classified as malls. Clearly, this could lead to underestimating sales.
 
Meanwhile, more data is coming this week. Car and light truck sales probably totaled more than 12-million at an annual rate for the second month in a row – the fastest pace since September 2008, except for during “cash-for clunkers.”
 
This is not just “pent-up demand.” Nor is it a “new normal.” The surge in consumer spending has its roots in improving fundamentals. Private sector wages and salaries are up 4% in the past year and small business income is up 5.8%. Productivity is boosting incomes for workers and companies.
 
In addition, the jobs picture is steadily getting brighter, with private sector payrolls up an average of 106,000 per month over the past six months. At 407,000, initial jobless claims have fallen to their lowest level in years, which points to continued improvement in payroll growth.
 
Meanwhile, consumers are still paying down debts, but they are doing it more slowly, leaving more money to spend than a year ago. And the share of after-tax earnings that households need to service their debts and make other recurring payments (rent, car leases, property taxes, etc.) has fallen below its long-run average and will soon be back to 1995 levels.
 
As we have said over-and-over again, things are far from perfect. Unemployment is still too high, government growth is creating uncertainty, the financial situation in Europe seems precarious, and fear seems to be an investment strategy. Nonetheless, a self-sustaining recovery is underway.
 
The Fed is easy, productivity is strong, the “panic” is over, and government policy (in the US and abroad) has taken a turn for the better. As a result, economic growth will surprise to the upside. As this strength becomes more self evident, confidence in equity markets will grow. Look out above.

[Body-by-Guinness]

There's No Escaping Hauser's Law
Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.

By W. KURT HAUSER

Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration's budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues.

Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this "Hauser's Law."

Over this period there have been more than 30 major changes in the tax code including personal income tax rates, corporate tax rates, capital gains taxes, dividend taxes, investment tax credits, depreciation schedules, Social Security taxes, and the number of tax brackets among others. Yet during this period, federal government tax collections as a share of GDP have moved within a narrow band of just under 19% of GDP.

Why? Higher taxes discourage the "animal spirits" of entrepreneurship. When tax rates are raised, taxpayers are encouraged to shift, hide and underreport income. Taxpayers divert their effort from pro-growth productive investments to seeking tax shelters, tax havens and tax exempt investments. This behavior tends to dampen economic growth and job creation. Lower taxes increase the incentives to work, produce, save and invest, thereby encouraging capital formation and jobs. Taxpayers have less incentive to shelter and shift income.

On average, GDP has grown at a faster pace in the several quarters after taxes are lowered than the several quarters before the tax reductions. In the six quarters prior to the May 2003 Bush tax cuts, GDP grew at an average annual quarterly rate of 1.8%. In the six quarters following the tax cuts, GDP grew at an average annual quarterly rate of 3.8%. Yet taxes as a share of GDP have remained within a relatively narrow range as a percent of GDP in the entire post-World War II period.

View Full Image

Getty Images/Imagezoo
This is explained once the relationship between taxes and GDP growth is understood. Under a tax increase, the denominator, GDP, will rise less than forecast, while the numerator, tax revenues, will advance less than anticipated. Therefore the quotient, the percentage of GDP collected in taxes, will remain the same. Nineteen percent of a larger GDP is preferable to 19% of a smaller GDP.

The target of the Obama tax hike is the top 2% of taxpayers, but the burden of the tax is likely to fall on the remaining 98%. The top 2% of income earners do not live in a vacuum. Our economy and society are interwoven. Employees and employers, providers and users, consumers and savers and investors are all interdependent. The wealthy have the highest propensity to save and invest. The wealthy also run the lion's share of small businesses. Most small business owners pay taxes at the personal income tax rate. Small businesses have created two-thirds of all new jobs during the past four decades and virtually all of the net new jobs from the early 1980s through the end of 2007, the beginning of the past recession.

In other words, the Obama tax increases are targeted at those who are largely responsible for capital formation. Capital formation is the life blood for job creation. As jobs are created, more people pay income, Social Security and Medicare taxes. As the economy grows, corporate income tax receipts grow. Rising corporate profits provide an underpinning to the stock market, so capital gain and dividend tax collections increase. A pro-growth, low marginal personal tax rate stimulates capital formation and GDP, which triggers a higher level of tax receipts for the other sources of government revenue.

It is generally accepted that if one taxes something, one gets less of it and if something is subsidized one gets more of it. The Obama administration is also proposing an increase in taxes on capital itself in the form of higher capital gains and dividend taxes.

The historical record is clear on this as well. In 1987 the capital gains tax rate was raised to 28% from 20%. Capital gains realizations as a percent of GDP fell to 3% in 1987 from about 8% of GDP in 1986 and continued to fall to below 2% over the next several years. Conversely, the capital gains tax rate was cut in 1997, to 20% from 28% and, at the time, the forecasts were for lower revenues over the ensuing two years.

In fact, tax revenues were about $84 billion above forecast and above the level collected at the higher and earlier rate. Similarly, the capital gains tax rate was cut in 2003 to 15% from 20%. The lower rate produced a higher level of revenue than in 2002 and twice the forecasted revenue in 2005.

The Obama administration and members of Congress should study the record on how the economy reacts to changes in the tax code. The president's economic team has launched a three-pronged attack on capital: They are attacking the income group that is the most responsible for capital formation and jobs in the private sector, and then attacking the investment returns on capital formation in the form of dividends and capital gains. The out-year projections on revenues from these tax increases will prove to be phantom.

Mr. Hauser is chairman emeritus of the Hoover Institution at Stanford University and chairman of Wentworth, Hauser & Violich, a San Francisco investment management firm. He is the author of "Taxation and Economic Performance" (Hoover Press, 1996).

http://online.wsj.com/article/SB10001424052748703514904575602943209741952.html?KEYWORDS=hauser

[DougMacG]

Thank you BBG for posting the Hauser piece.  You nailed it with this: "Better to cut rates and get 19% of a larger pie."

I would add, why not constitutionally limit federal spending to 19% of most recently measured GDP since that is the most we know we can afford. 

[Body-by-Guinness]

The Dead Enders

Even after their defeat, Democrats keep insisting on a tax increase.
'It is not a sensible way to run a country to have this magnitude of tax issues left to annual uncertainty," said Treasury Secretary Tim Geithner earlier this month, and he's certainly right about that. But at the current moment the single biggest obstacle to more certainty is his boss, President Obama, who still refuses to compromise on the tax increase set to whack the economy in a mere 30 days.

After meeting with Congressional leaders yesterday, Mr. Obama dispatched Mr. Geithner and budget director Jacob Lew to negotiate a deal. Yet the President is still holding out against even a temporary extension of the 2001 and 2003 tax rates. Republicans won 63 House seats running against those tax increases, but Mr. Obama still seems under the spell of the dead enders led by soon-to-be-former House Speaker Nancy Pelosi.

The magnitude of the looming tax increase ought to snap him out of this hypnosis. If the Democrats who still run Capitol Hill for another month fail to act, tens of millions of American households will see their paychecks shrink immediately in the New Year.

Capital gains and dividend tax rates will climb to 20% and 39.6%, respectively, from 15%, and the top two income tax rates will climb to 38% and 41% (including deduction phaseouts), from 33% and 35%. The typical family with an income between $40,000 and $75,000 a year will pay as much as $2,000 more in 2011, as the 10% tax rate bracket and the $1,000 per child tax credit vanish.

This could have been resolved months ago, except that the White House and Congressional Democrats insist that some taxes must be raised. Mr. Obama wants the lower rates to expire on incomes of $200,000 for individuals and $250,000 for couples. Dozens of Democrats revolted against that in the campaign, so the latest gambit, courtesy of New York Senator Chuck Schumer, would raise that threshold to $1 million.

Republicans shouldn't be suckered into raising taxes on anyone, especially not on small business job creators. The U.S. corporate tax rate of 39% (a combination of state average and federal rates) is already about 15 percentage points above the international average, and for the first time in a generation the personal rate of 41% would rise above the average of our overseas rivals. That's all before the 3.8% surtax on investment income arrives in 2013, courtesy of ObamaCare.

Because most nations tax their companies at a business rate lower than the personal rate, the Tax Foundation says the Obama plan would mean that many Subchapter S corporations in the U.S. would pay "virtually the highest tax rates in the world on their business income." In other words, the after-tax rate of return on investment in the U.S. would fall relative to investing in Europe or Asia. This is an invitation to outsource more jobs. The U.S. should be cutting tax rates to become more competitive, as President Obama's deficit reduction commission and tax reform advisory panel have recommended.

About half the income taxed above $250,000 is business income, so small businesses get hammered from the Obama plan. Mr. Schumer argues that if the income threshold for higher taxes is raised to $1 million, Republicans will no longer be able to claim that this plan taxes small business income.

Not so. The Small Business Administration classifies a small business as an entity with fewer than 500 employees. The Schumer plan shifts the tax onto larger, more profitable firms from relatively smaller ones. But this still puts jobs at risk. A business with $1 million or $10 million of net income has many times more employees and does a lot more hiring than a business with, say, $60,000 of net income or one that is losing money.

The Tax Foundation estimates that of tax filers reporting income of more than $1 million a year, about 80% have business income and that more than 60% of millionaire income is either business or investment income. So about two of every three dollars raised would come directly out of business coffers—i.e., from the capital that businesses need to expand their operations.

Democrats say a millionaire surtax would raise about $50 billion a year, but don't count on it. Millionaires tend to be financially sophisticated and are well equipped to respond to higher rates by finding tax shelters, exploiting loopholes (municipal bonds!) or simply working less. If high tax rates were irrelevant to economic decisions, the soak-the-rich states of New York, New Jersey and California wouldn't be losing millionaires to better tax climates.

Tax payments by millionaire households more than doubled to $273 billion in 2007 from $132 billion after the tax rates were cut in 2003. The number of tax returns with $1 million or more in annual reported income doubled over that period thanks to the strong economic rebound. Tax payments by millionaires also increased dramatically after the Reagan and Kennedy tax rate reductions.

Republicans shouldn't oversell an extension of the current tax rates as an economic panacea. Making the lower rates permanent would do far more for economic growth by removing one more source of uncertainty. And there are many spending and regulatory threats to growth that must be removed. But at least an extension would avoid a tax blow to a recovery that is still struggling to become a sustainable expansion.

***
Even in this lame duck liberal Congress, there is a bipartisan majority in both houses to prevent this tax increase. The only obstacles are a defeated, willful liberal minority that wants to extract one more pound of flesh from the private economy, and a President who still fails to comprehend that jobs and wealth are created outside of government and politics. If Democrats won't compromise this month, the first vote in the new Republican House in January should be to repeal the Obama-Pelosi-Schumer tax increase.

http://online.wsj.com/article/SB10001424052748703326204575616843991237032.html?mod=djemEditorialPage_h

[Crafty_Dog]

Non-farm productivity (output per hour) rose at a 2.3% annual rate in the third quarter To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/1/2010


Non-farm productivity (output per hour) rose at a 2.3% annual rate in the third quarter and is up 2.5% versus last year.

Real (inflation-adjusted) compensation per hour in the non-farm sector increased at a 0.8% annual rate in Q3 and is up 0.2% versus last year. Unit labor costs declined at a 0.1% rate in Q3 and are down 1.1% versus a year ago.
 
In the manufacturing sector, the Q3 growth rate for productivity (0.6%) was much lower than among non-farm businesses as a whole. Output grew faster in manufacturing but the growth of hours worked was higher as well, resulting in slower growth in output per hour. Real compensation (0.1%) was softer in manufacturing but unit labor costs (1.0%) were stronger than in the non-farm business sector, a function of slower productivity growth.
 
Implications:  Productivity growth was revised up for Q3, exactly as the consensus expected. This is a solid rebound from its decline in Q2, which had some analysts worried. Productivity has increased in six of the last seven quarters and we believe the trend will continue. In the past year, productivity has grown at a 2.5% annual rate despite the fact that hours worked have increased in each of those quarters as well.  Even as output rebounds, technology will continue to increase efficiency, allowing workers to do more per hour.  In other news this morning, the ADP Employment index, a measure of private-sector payrolls, increased 93,000 in November, the largest gain so far in the recovery.  In the past six months, on average, the ADP index has underestimated growth in the official Labor Department measure of private payrolls by 55,000.  It has a long way to go, but the recovery in the labor market is well underway. In other recent news, the Case-Shiller index, a measure of home prices in the 20 largest metro areas around the country, declined 0.8% in September (seasonally-adjusted), the third straight monthly decline.  However, smoothing out the upswing and downswing related to the homebuyer credit, national average prices are still up 0.6% versus a year ago.  Prices are still 3.2% above the bottom in May 2009 and we do not anticipate going below that level.

[DougMacG]

I am a big fan of Wesbury; he was my pick for Fed chair.  That said, ...

2.3% and 2.5% are growth rates that never get us out of this funk.  We are not coming out of this IMHO because all of the underlying problems are still staring us in the face and still getting worse.

The productivity increases come from success of layoffs, not from growth.

The huge tax increase coming on employers, investment and capital is sure to keep the growth rate low, if positive at all.

My recollection from my readings and analysis is that 3.1% growth is breakeven or ordinary growth, not even improving circumstance or solving our unsolvable fiscal challenges.  Maybe it is some other number but it isn't the growth we have now.

Yesterday I saw that Rep. Mike pence re-proposed the flat tax. http://www.realclearpolitics.com/video/2010/11/30/rep_mike_pence_proposes_flat_tax.html  Maybe if this miserable economy is stagnant long enough people will reach for a bold growth strategy and leave these days of covet, encumber and capture behind us.  Tax each dollar the same and then, besides economic growth,  we would have good one example of equal protection under the law.

[Crafty_Dog]

I too have a high opinion of Wesbury (and, in a similar vein, Scott Grannis) but find myself quite torn between Glenn Beck et al and them.  I recently signed up for missives from Wesbury and will be posting some of it here-- I think we need to stay in touch with intelligent non-apocalyptic lines of thought, even though we may disagree

[G M]

I wish Wesbury and Grannis would address how we won't be crushed by debt and other looming catastropies. It sure looks bleak to me, I'm hoping that I'm wrong.

[Crafty_Dog]

Agreed.

Grannis does say that there will be some (i.e. too much) inflation.

[Crafty_Dog]

Data Watch

--------------------------------------------------------------------------------
The ISM non-manufacturing index rose to 55.0 in November To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/3/2010


The ISM non-manufacturing composite index rose to 55.0 in November from 54.3 in October, beating the consensus expected gain to 54.8. (Levels above 50 signal expansion; levels below 50 signal contraction.)

Most key sub-indexes were higher in November, and all remain at levels indicating economic growth. The new orders index increased to 57.7 from 56.7, the employment index rose to 52.7 from 50.9, and the supplier deliveries index rose to 52.5 from 51.0. The business activity index fell to a still strong 57.0 from 58.4 last month.
 
The prices paid index fell to 63.2 in November from 68.3 in October.   
 
Implications:  The service sector rebound continues after the Summer swoon, with today’s report beating expectations for the third month in a row.  The ISM non-manufacturing index increased to 55.0 from 54.3 in October, showing that economic growth is continuing to accelerate into the end of the year. The most encouraging detail in the report was the employment index, which reached its highest level in over three years. The new orders index rose to 57.7 from 56.7 in October as well, which means the outlook for the service sector looks bright. On the inflation front, the prices paid index fell to 63.2 from 68.3 in October. Despite this drop, the index remains at elevated levels. In other recent news, automakers sold cars and light trucks at a 12.3 million annual rate in November.  This is faster than the 12.1 million the consensus expected and 13% higher than a year ago.  On the housing front, pending home sales – contracts on existing homes – soared 10.4% in October, the largest percentage increase for any month on record (dating back to 2001).  This suggests existing home sales, which are counted at closing, will rebound sharply in November.

[Body-by-Guinness]

OUTCOME OF THE STIMULUS AND THE BURDEN OF PROOF

e21 team | December 2, 2010
At e21, we have observed that arguments in favor of fiscal stimulus are often predicated on mechanistic assumptions regarding the role of government spending in increasing employment levels. We have called for a more empirical approach that uses real-world data to assess the impact of the 2009 ARRA fiscal stimulus legislation.

On the tax cut portion of stimulus legislation, we have highlighted research by Claudia Sahm, Matthew Shapiro, and Joel Slemrod that drew on survey data suggesting that only 13% of households reported higher spending levels due to the one-time tax cuts in the fiscal stimulus. This casts doubt on the models used by the CEA and the CBO to assess the impact of ARRA, and on various private forecasting models that relied on the same set of assumptions.

A new study by Daniel Wilson at the San Francisco Fed calls into question the idea that the stimulus legislation as a whole — including the state transfers and direct spending portion — failed to generate the promised improvements in employment.

It is difficult to properly calculate the effects of the 2009 ARRA bill, as it was a nation-wide program. Though employment and growth failed to respond to ARRA as the Administration had suggested, fiscal stimulus advocates have argued that employment levels would have been lower still without the program.

Wilson’s study makes an important contribution to this debate by focusing on state-by-state comparisons. A large portion of stimulus funding at the state level was based on criteria that were entirely independent of the economic situation that states faced. For example, the number of existing highway miles was used to calculate additional transportation spending.

The study uses this resulting variation in state-level stimulus funding to determine what impact ARRA funding had on employment — including both the direct impact of workers hired to complete planned projects, as well as any broader spillover effects resulting from greater government spending. Administration economists have repeatedly emphasized the importance of this indirect employment growth in driving economic recovery.

The results suggest that though the program did result in 2 million jobs “created or saved” by March 2010, net job creation was statistically indistinguishable from zero by August of this year. Taken at face value, this would suggest that the stimulus program (with an overall cost of $814 billion) worked only to generate temporary jobs at a cost of over $400,000 per worker. Even if the stimulus had in fact generated this level of employment as a durable outcome, it would still have been an extremely expensive way to generate employment.

Interestingly, federal assistance to state Medicaid programs appears to have decreased local and state government employment. One possibility is that requirements to maintain full Medicaid benefits in order to receive federal aid proved sufficiently expensive that state governments pushed though additional rounds of layoffs in non-health related areas. This finding may suggest a potential pitfall with the Wyden-Brown proposal to decentralize health reform efforts at the state level: if comprehensive insurance requirements are retained, the net effect of reform may only shift safety-net spending towards healthcare and away from other urgent priorities such as education or welfare assistance.

The results of this one study should not be seen as definitive. As Wilson emphasizes, the results only apply to the variation caused by additional state-level spending. It is possible that the stimulus did generate a certain level of base employment growth to all states — or that the stimulus “crowded out” private investment on a nation-wide basis.

It is also difficult to determine the counterfactual employment growth that would have resulted in the absence of the fiscal stimulus law. To address this issue, Wilson includes other variables predictive of future employment growth. However, it is possible that employment would indeed have been worse in all states without a stimulus. It is also possible that employment would have been better than projected — for instance, if the Fed or Treasury had responded to higher unemployment through their own interventions.

Still, this result should be taken seriously, as it represents one of the few actual analyses of the stimulus program that does not rely on outdated multiplier estimates that assume their result.

Importantly, the results are also consistent with another recent analysis of government spending during Great Depression by economists Price Fishback and Valentina Kachanovskaya. During a period in which unemployment was extremely high and the costs of implementing a public works program were far lower than today, one might expect that fiscal stimulus might have proven more effective. Yet Fishback and Kachanovskaya find that a similar state-by-state analysis suggests that fiscal stimulus during the Great Depression failed to yield durable employment gains.

The burden of proof is now increasingly on the side of fiscal stimulus advocates. It is easy to point out possible flaws in each of the studies mentioned here — though the biases may end up either exaggerating or diminishing the estimates of the effects of the stimulus. But where is the evidence that the 2009 ARRA fiscal stimulus enhanced employment recovery in a cost-effective and sustainable manner?

http://www.economics21.org/blog/outcome-stimulus-and-burden-proof

[Body-by-Guinness]

Forty minute evisceration of the Fed:

[youtube]http://www.youtube.com/watch?feature=player_embedded&v=yLynuQebyUM#![/youtube]

[Crafty_Dog]

Bailing out … the Irish, Greeks, Spanish, Portuguese or whoever - SIMPLE

It is a slow day in a damp little Irish town. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt and everybody lives on credit. On this particular day a rich German tourist is driving through the town, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night. The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher. The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmers' Co-op takes the €100 note and runs to pay his drinks bill at the pub. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit. The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note. The hotel proprietor then places the €100 note back on the counter so the rich German will not suspect anything. At that moment the German comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money and leaves town. No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism. And that, ladies and gentlemen, is how the bailout package works.

[Crafty_Dog]

makes a case for bullishness:

http://scottgrannis.blogspot.com/

[G M]

Housing prices will be down at least 10% lower than they are today, at a minimum. 12/10/10

[Crafty_Dog]

It's A Good Deal To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/13/2010


As the Senate votes to pass the tax cut deal announced by President Obama last Monday night, political debate rages on. What’s left of the Left in Congress hates the deal. It’s the second drubbing in a row (November 2nd, being the first). The deal says “lower tax rates are better than higher tax rates.”

After years of complaining about the Bush tax cuts on the wealthy, two Democratic Presidents (Clinton and Obama) have now come out in support of them. President Obama’s chief political advisor, David Axelrod, called that part of the deal “odious” on the Sunday talk shows.
 
Some Republicans don’t like the deal because it includes, by their count, more than $300 billion in “spending” that they feel they were elected to stop. This includes the one-year reduction in the payroll tax rate, extending the program of 99 weeks of unemployment benefits, plus other tax credits.
 
There is still a small chance that Congress will add so many goodies as the bill is written (like continued credits for ethanol), that the deal becomes unsupportable. But, the odds of any crack-up on the way to passage remain very low. We expect it to pass within the next week or two with very minor additions.
 
The benefits of the deal outweigh its costs by a significant margin. The consensus seems to expect about a 1% kick to real GDP growth from a deal, but that is in comparison to “no deal.” We have been more bullish than the consensus and have expected the extension of Bush era tax rates. As a result, we have raised our forecast a small amount – from 3.7% real GDP growth in 2011 to 4%.
 
Many have argued that the “cost” of the deal is $900 billion, but this is Washington speak and has little to do with reality. After bottoming at an annual run rate of $2.0 trillion (roughly 14.5% of GDP) in 2009, total tax revenues to the federal government have climbed to about $2.2 trillion (15% of GDP) in the past year. This has happened without higher tax rates. And as long as the economy continues to recover, revenues will continue to climb, eventually rising back to 19% of GDP, where they were before the Panic of 2008. After that, “bracket creep” generated by economic growth will push revenue even higher relative to GDP.
 
In other words, the US does not need higher tax rates in order to gather more revenue and balance the budget. If government spending were frozen at current levels, the budget would be balanced at the end of 2014. If government spending were cut back to 2008 levels, a balanced budget could be achieved sooner than that. In other words, this deal does not spin the budget out of control. On the contrary, it focuses all the energy of those who want to balance the budget on the spending side of the ledger rather than the tax side. This is great news.
 
Some analysts are trying to tie rising Treasury bond yields to fears about a bigger deficit and the “cost” of the deal. This is a misreading of the markets. Treasury bond yields are rising because a tax hike has been avoided and economic growth is likely to be robust. The bottom line is that stocks remain cheap, while bonds are certainly not.