GregNews

Here’s Brian Riedl on why the economy is a mess. Hint: Bush tax cuts aren’t “spending.” (By the way, on that first myth, and this is highly relevant with the news that the Obama administration has turned to former Clinton era budget director Jacob Lew, let’s not forget that Clinton had the benefit of the “peace dividend,” or slashing the defense budget from the 6-7% of GDP it had been in the Cold War to barely 3% it became after the fall of the Soviet Union. That’s a ton of moolah!)

[MYTH #1] • The Bush tax cuts wiped out last decade’s budget surpluses. Sen. John Kerry (D., Mass.), for example, has long blamed the tax cuts for having “taken a $5.6 trillion surplus and turned it into deficits as far as the eye can see.” That $5.6 trillion surplus never existed. It was a projection by the Congressional Budget Office (CBO) in January 2001 to cover the next decade. It assumed that late-1990s economic growth and the stock-market bubble (which had already peaked) would continue forever and generate record-high tax revenues. It assumed no recessions, no terrorist attacks, no wars, no natural disasters, and that all discretionary spending would fall to 1930s levels.

The projected $5.6 trillion surplus between 2002 and 2011 will more likely be a $6.1 trillion deficit through September 2011. So what was the cause of this dizzying, $11.7 trillion swing? I’ve analyzed CBO’s 28 subsequent budget baseline updates since January 2001. These updates reveal that the much-maligned Bush tax cuts, at $1.7 trillion, caused just 14% of the swing from projected surpluses to actual deficits (and that is according to a “static” analysis, excluding any revenues recovered from faster economic growth induced by the cuts).

The bulk of the swing resulted from economic and technical revisions (33%), other new spending (32%), net interest on the debt (12%), the 2009 stimulus (6%) and other tax cuts (3%). Specifically, the tax cuts for those earning more than $250,000 are responsible for just 4% of the swing. If there were no Bush tax cuts, runaway spending and economic factors would have guaranteed more than $4 trillion in deficits over the decade and kept the budget in deficit every year except 2007.

…

Over the past 50 years, tax revenues have deviated little from their 18% of gross domestic product (GDP) average. Despite a temporary recession-induced dip, CBO projects that even if all Bush tax cuts are extended and the AMT is patched, tax revenues will rebound to 18.2% of GDP by 2020—slightly above the historical average. They will continue growing afterwards.Spending—which has averaged 20.3% of GDP over the past 50 years—won’t remain as stable. Using the budget baseline deficit of $13 trillion for the next decade as described above, CBO figures show spending surging to a peacetime record 26.5% of GDP by 2020 and also rising steeply thereafter.

Putting this together, the budget deficit, historically 2.3% of GDP, is projected to leap to 8.3% of GDP by 2020 under current policies. This will result from Washington taxing at 0.2% of GDP above the historical average but spending 6.2% above its historical average.

Entitlements and other obligations are driving the deficits. Specifically, Social Security, Medicare, Medicaid and net interest costs are projected to rise by 5.4% of GDP between 2008 and 2020. The Bush tax cuts are a convenient scapegoat for past and future budget woes. But it is the dramatic upward arc of federal spending that is the root of the problem.

It’s said that all history occurs twice, first as tragedy and second as farce. That bears repeating with at least one element of the proposed “financial overhaul,” the Dodd-Frank Wall Street Reform Act. That element, writes Eugene White, is the “Financial Crisis Fund,” a fund in which Sens. Dodd and Frank propose strong banks will pony up for a $19 billion “war chest” to be reserved for the next banking crisis, supposedly also aimed to “protect the taxpayers.” Aren’t Misters Dodd and Frank so kind… if only they’d apply that same thinking to the Bush tax cuts scheduled to expire in 2011, creating the single largest tax increase in American history.

The problem facing Dodd and Frank Democrats, says White, is that we tried this before, in 1893, and the same economic arguments that lead to its defeat then have not been solved today.

When [William Jennings] Bryan [(D, Neb)] presented his bill to the House committee, he was met with skepticism from both Democrats and Republicans. One critic, Nils P. Haugen (R., Wis.) quickly pointed out that many recent bank failures were quite large, “and that would be a great draft upon the fund in the case of a failure of two or three large banks,” easily exhausting it.

One of Bryan’s most telling exchanges was with Nicholas N. Cox (D., Tenn.):

Cox: “Now, the fund becomes exhausted and you have to assess another tax to make it good, and then after that is exhausted you have to assess another?”

Bryan: “Yes.”

Cox: “Then how can you arrive at any certainly about [the $10,000,000 figure]? Take this panic on hand now, and six, eight or 10 banks have broken in a technical sense and the depositors closed out, and they want their money, now it does not strike you that you would have to be continually assessing the solvent banks to supply those which have broken?”

Bryan: “A greater [one] than I has said that you can only judge the future by the past, and judging by the past, I do not think the danger of which you speak is a proximate one at all.”

Cox: “If it does not go to that extent, does it not result in the end that the good banks, that the well-managed banks, stand as a guard for the badly managed banks?”

With distaste for taxing safer banks to protect risky ones and distrust about the seemingly modest sum required by Bryan, the committee dismissed the bill. When the next big panic hit in 1907, fewer banks suspended business than in 1893. But as Bryan’s critics had correctly guessed, failing financial institutions were larger and outside the safety net that he had originally proposed. They were trust companies that had engineered their operations around the existing system of state and federal regulations and were now at the epicenter of the crisis. The fund would have been inadequate and perhaps have engendered a complacency that might well have made the 1907 crisis even worse.

Wondering what $10 million meant in 1893? It was 0.065% of GDP in 1893, while $20 billion is 0.132% of 2009 GDP. The ante has been roughly doubled by the Dodd-Frank bill, but the criticism of the bewhiskered men in starched collars is still on the mark.

[WSJ] President Obama hailed the financial bill that House-Senate negotiators finally vouchsafed at 5:40 a.m. Friday, and no wonder. The bill represents the triumph of the very regulators and Congressmen who did so much to foment the financial panic, giving them vast new discretion over every corner of American financial markets.

Chris Dodd and Barney Frank, those Fannie Mae cheerleaders, played the largest role in writing the bill. Congressman Paul Kanjorski even offered a motion to memorialize it as the Dodd-Frank Act. It’s as if Tony Hayward of BP were allowed to write new rules on deep water drilling.

The Federal Reserve, which promoted the housing mania and failed utterly in its core mission of monitoring Citigroup, will now have more power to regulate more financial institutions and more ability to dictate the allocation of credit.

The Treasury, which bailed out institutions willy-nilly without consistent rules, will now lead the Financial Stability Oversight Council that will have the arbitrary power to define which financial companies pose a “systemic risk” and which can be shut down without recourse to bankruptcy. Willy-nilly will now be the law.

And the SEC, which created the credit-ratings oligopoly and missed Bernie Madoff, will get new powers to decide how easy it should be for union pension funds to get their candidates on corporate proxy ballots.

Oh, and Fannie Mae and Freddie Mac? They aren’t touched at all, even as they continue to lose billions of taxpayer dollars each quarter.

In other words, our Washington rulers have taken 2,000 or so pages to double and triple down on the old system that failed.

It gets worse. Not only did the bill not address bank regulations, something our not so watchdog media failed to recognize, it actually added a $19 billion tax to pay for all this new “regulation.” Question for the Obama camp: When you’ve already got 10% unemployment how will raising taxes create incentive for companies to hire more workers? Good luck with that election come November’s stagnant 10% unemployment rate.

And if you think our hyper-regulations already made no sense, check out how the EPA considers spilt milk an “oil spill.” (Thanks to John Stossel for pointing this out):

If only George Will were in Congress he could ask Supreme Court nominee Elena Kagan these questions:

– It would be naughty to ask you about litigation heading for the Supreme Court concerning this: Does Congress have the right, under its enumerated power to regulate interstate commerce, to punish the inactivity of not purchasing health insurance? So, instead answer this harmless hypothetical: If Congress decides that interstate commerce is substantially affected by the costs of obesity, may Congress require obese people to purchase participation in programs such as Weight Watchers? If not, why not?

– The government having decided that Chrysler’s survival is an urgent national necessity, could it decide that “Cash for Clunkers” is too indirect a subsidy and instead mandate that people buy Chrysler products?

– If Congress concludes that ignorance has a substantial impact on interstate commerce, can it constitutionally require students to do three hours of homework nightly? If not, why not?

– Can you name a human endeavor that Congress cannot regulate on the pretense that the endeavor affects interstate commerce? If courts reflexively defer to that congressional pretense, in what sense do we have limited government?

– In Federalist 45, James Madison said: “The powers delegated by the proposed Constitution to the federal government are few and defined. Those which are to remain in the state governments are numerous and indefinite.” What did the Father of the Constitution not understand about the Constitution? Are you a Madisonian? Does the doctrine of enumerated powers impose any limits on the federal government? Can you cite some things that, because of that doctrine, the federal government has no constitutional power to do?

– Is it constitutional for Arizona to devote state resources to enforcing federal immigration laws?

– Is there anything novel about the Arizona law empowering police officers to act on a “reasonable suspicion” that someone encountered in the performance of the officers’ duties might be in the country illegally?

– The Fifth Amendment mandates “just compensation” when government uses its eminent domain power to take private property for “public use.” In its 2005 Kelo decision, the court said government can seize property for the “public use” of transferring it to wealthier private interests who will pay more taxes to the government. Do you agree?

– Should proper respect for precedent prevent the court from reversing Kelo? If so, was the court wrong to undo the 1896 ruling in Plessy v. Ferguson that segregating the races with “separate but equal” facilities is constitutional?

– In 1963, President John Kennedy said Congress should “make a commitment . . . to the proposition that race has no place in American life or law.” Was he right?

– In 1964, Sen. Hubert Humphrey, a principal sponsor of that year’s Civil Rights Act, denounced the “nightmarish propaganda” that the law would permit preferential treatment of an individual or group because of race or racial “imbalance” in employment. What happened?

– William Voegeli, contributing editor of the Claremont Review of Books, writes: “The astonishingly quick and complete transformation of the Civil Rights Act of 1964, from a law requiring all citizens be treated equally to a policy requiring that they be treated unequally, is one of the most audacious bait-and-switch operations in American political history.” Discuss.

– In a 2003 case affirming the constitutionality of racial preferences in law school admissions, Justice Sandra Day O’Connor said: “We expect that 25 years from now, the use of racial preferences will no longer be necessary to further the interest approved today.” If you are a sitting justice in 2028, do you expect to conclude that such preferences can no longer survive constitutional scrutiny because they no longer serve a compelling public interest?

– The president is morose about the court’s Citizens United decision holding that the First Amendment, which says Congress shall make “no law” abridging freedom of speech, means no laws abridging a corporation’s freedom to speak, including nonprofit advocacy corporations such as the National Rifle Association and the Sierra Club. The court called it “censorship” for government “to command where a person may get his or her information or what distrusted source he or she may not hear.” Do you agree?

– You have noted that the court often considers legislative motives when deciding First Amendment cases. Should the court consider legislators’ motives if, in response to Citizens United, they impose new burdens on corporate speech?

– When incumbent legislators write laws restricting the quantity, content and timing of speech about legislative campaigns, are not their motives presumptively suspect?

– Regarding campaign finance “reforms”: If allowing the political class to write laws regulating the quantity, content and timing of speech about the political class is the solution, what is the problem?

– If the problem is corruption, do we not already have abundant laws proscribing that?

– If the problem is the “appearance” of corruption, how do you square the First Amendment with Congress restricting speech to regulate how things “appear” to unspecified people?

– Incumbent legislators are constantly tinkering with the rules regulating campaigns that could cost them their jobs. Does this present an appearance of corruption?

– Some persons argue that our nation has a “living” Constitution; the court has spoken of “the evolving standards of decency that mark the progress of a maturing society.” But Justice Antonin Scalia, speaking against “changeability” and stressing “the whole antievolutionary purpose of a constitution,” says “its whole purpose is to prevent change — to embed certain rights in such a manner that future generations cannot readily take them away. A society that adopts a bill of rights is skeptical that ‘evolving standards of decency’ always ‘mark progress,’ and that societies always ‘mature,’ as opposed to rot.” Is he wrong?

– The Ninth Amendment says: “The enumeration in the Constitution of certain rights shall not be construed to deny or disparage others retained by the people.” The 14th Amendment says no state may abridge “the privileges or immunities” of U.S. citizens. How should the court determine what are the “retained” rights and the “privileges or immunities”?

– The 10th Amendment (“The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people”) is, as former Delaware governor Pete du Pont has said, “to the Constitution what the Chicago Cubs are to the World Series: of only occasional appearance and little consequence.” Were the authors of the Bill of Rights silly to include this amendment?

– Should decisions of foreign courts, or laws enacted by foreign legislatures, have any bearing on U.S. courts’ interpretations of the Constitution or federal laws (other than directly binding treaties)?

– The Fifth Amendment says private property shall not be taken by government for public use without just compensation. But what about “regulatory takings”? To confer a supposed benefit on the public, government often restricts how persons can use their property, sometimes substantially reducing the property’s value. But government offers no compensation because the property is not “taken.” But when much of a property’s value is taken away by government action, should owners be compensated?

– In Bush v. Gore, which settled the 2000 election, seven justices ruled that Florida vote recounts that were being conducted in different jurisdictions under subjective and contradictory standards were incompatible with the Constitution’s guarantee of “equal protection of the laws.” Were they right?

– In Bush v. Gore, five justices held that Article II of the Constitution gives state legislatures plenary power to set the rules for presidential elections. The Florida legislature fashioned election rules to produce presidential electors immune from challenge by Congress. But the legislature said that immunity depended on electors being chosen by a certain date, which could not be met if further recounts were to ensue. The court held that allowing more recounts would have contravened the intent of Florida’s legislature. So the recounts were halted. Was the court’s majority correct?

– Justice Thurgood Marshall, for whom you clerked, said: “You do what you think is right and let the law catch up.” Can you defend this approach to judging?

– You have said: “There is no federal constitutional right to same-sex marriage.” But that depends on what the meaning of “is” is. There was no constitutional right to abortion until the court discovered one 185 years after the Constitution was ratified, when the right was spotted lurking in emanations of penumbras of other rights. What is to prevent the court from similarly discovering a right to same-sex marriage?

– Bonus question: In Roe v. Wade, the court held that the abortion right is different in each of the three trimesters of pregnancy. Is it odd that the meaning of the Constitution’s text would be different if the number of months in the gestation of a human infant were a prime number?