The Watcher's Council Forum: Is America In Decline? Why Or Why Not?

Each week, the Watcher's Council hosts a forum, in addition to holding a weekly contest for best posts among the members of the Council. I have been kindly invited to respond to this week's question. Update: The forum is up, with several different answers to the question, all worth your read.

It is beyond question that our nation is in decline. We stand mired in historic levels of debt, yet massive deficit spending by Congress continues unabated. Regulations are being pumped out by unelected bureaucrats at record pace, working fundamental changes to our nation that could never pass Congress. Yet Congress sits by and the odd Congresscritter only occasionally impotently complains in speeches. Medicare and Social Security threaten to bankrupt our nation in the foreseeable future unless reformed, yet Congress does not just nothing, but manages to compound the problems with Obamacare. We have a tyrannical President who unconstitutionally threatens our country's make up by unilaterally legislating the legalization of millions of illegal aliens, while an utterly supine Congress with the sole Constitutional authority to legislate is allowing this to happen. It appears that elections for either party no longer matter to change our national trajectory.

Our Supreme Court today sits as a sort of unelected Politburo deciding that the Constitution means whatever five of them want it to mean based on their whim of the day. What was supposed to be the least dangerous of our co-equal branches of government is now arguably the most dangerous. The left is using our military as a laboratory for insane social experiments, the worst being to allow women into front line combat units, something that can only be accomplished in any number by lowering the physical standards. And that does not even begin to consider the impact on unit cohesion. Space exploration as well as virtually everything to do with space is without doubt of incredible importance to our future. Moreover, it is vital that we continue to develop space defense technology to protect our many satellites upon which modern life is dependant. Space technology is an area where we have still a distinct advantage, yet Obama has killed our nation's space program. Lastly, our national security posture hasn't been this bad since the 1930's.

I think it would be fair to say we are not merely in decline, but rapidly approaching key tests during our descent that will determine our future. It is hard to say which will be the first key test, whether it will come in the form of severe economic stress as the interest rates rise on our outrageous national debt, or whether it will come in the choking of our economy by ever more far reaching regulations by the EPA and FCC, or whether it will come from foreign countries energized by our growing weakness. The only sure lesson of history is that the tests will come.

Our nation has proven resilient in the past, but in the past, we've been much better positioned to respond to challenges. In the past hundred years, we've faced the Depression and come through. But that was at a time when our massive excess industrial capacity sat untapped and we started from a point with no major deficits. We faced WWII and came through. But that was at a time when the other allied nations had strong militaries of their own, not the empty shells that they now have. We faced down the Soviet Union, but that was at a time when our military was at the pinnacle of its strength, not now when Obama has starved our military for funding, going so far as to change our national security posture from being able to fight two simultaneous wars to one. That was a change not based on any threat assessment, but rather a desire to divert the savings to his various welfare programs. And he has likewise overseen the devolution of our nuclear capacity -- something that has maintained the peace in Europe for 75 years -- because of his insane, utopian vision of a world without nuclear weapons. Somebody, please inform the North Koreans, the Iranians, and the other Middle Eastern nations now initiating their own nuclear weapons programs.

Bookworm Room has added her own cogent thoughts to this list above. To paraphrase, in the past, when challenges faced our nation, we had a fundamental love of country to join us. Our immigrants once came for the freedom to seek wealth. Yet today, "our immigrants come for handouts that they then wire to the tyrannies back home." And worst of all:

Our young people once thought that we brought freedom to the world; our young people now believe that we are evil. When a nation's young people think that they and their country are unworthy, the ink is on the suicide pact. And when they've been trained to think of themselves as fragile victims, you can bet that the first drop of blood spilled will seal that pact.

It is hard for me to believe that America will retain a dominant position in the world beyond another decade or so. Perhaps this would not matter if America was intrinsically evil as the left seems to think, or if those who would replace us were benign. The reality is that no nation is strong enough to take our place at the moment, and those who will vie for influence do not have a history of rule by law or democracy. Nor do I believe there is any leader we could elect in 2016 that could restore the Constitutional systems that have allowed us to flourish for much of the past two centuries.

That said, perhaps in response to the key tests and trials foreseeable on our national horizon, things might change. My pessimism is moderated by the reality that history has few straight lines, and great nations have rarely gone gentle into that good night. But my pessimism is made worse by the knowledge that, with key tests and trials come great costs in gold and in blood. The question is not whether America is in decline, but how low we must fall before we even begin to recover, and at what cost?

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Mr. Smith Christie Goes To Washington

You cannot fix these problems without talking about them," he said during a speech at the conservative American Enterprise Institute (AEI). "And I look at what's happening in Washington, D.C., right now and I'm worried. I'm worried."

Obama is not talking about entitlements because he is waiting for the Republicans, Christie said, "And our new bold Republicans in the House of Representatives ... are not talking about it because they are waiting for him to talk about it.

"Whatever game that is being played down here, is irresponsible, it's dangerous."

Gov. Chris Christie, Speech at AEI, 16 Feb. 2011

Chris Christie came to Washington to speak at the American Enterprise Institute (AEI) today and lambasted those on both sides of the aisle for a lack of leadership. Given the fiscal Sword of Damocles hanging over our collective heads and Obama's complete absence of leadership, there is nothing that steadies the resolve at the moment so much as some good Christie porn. Below are the AEI videos posted so far on the speech. I will add more as they become available.







He will never be mistaken for Jimmy Stewart, but his impact on our national psyche promises to be much more far reaching. What will it take to get this guy to run for national office. What is his weakness? For Obama, just put him in front of a mirror. If you want to influence Berlusconi, it apparently takes a 17 year old Moroccan girl. It is much the same apparently for either Bill or Hillary. But for Christie - I don't know, maybe a lifetime supply of meatloaf? C'mon, we need to come up with something.

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Obama's Ridiculous Economic Meme

The biggest lie told over the past century is that the Democratic left are better stewards of the economy than Conservatives. It worked to in 2008. And Obama is trying to sell to America that the right "can't be trusted" to control our economy as "Bush got us into this mess." As proof thereof, he cites to deregulation and "Wall St. greed."

We are now stuck with a President who believes that the profit motive is immoral, that businesses should be soaked of their wealth for redistribution, and that the economy can be successfully micromanaged from Washington. And we are stuck with a far left Congress that is the most profligate of all time.

The truth is that our economy fell apart because of social engineering by Democrats. Over a roughly 15 year period, they ruined our credit rating scheme as part and parcel of a massive push for "affordable housing." Instead of pursuing this laudable goal by market-based programs, they did so by means of punitive, race based social engineering. At every turn, they used the race card to protect the scheme. And in the end, they created a bubble with Fannie and Freddie that got so big that when it burst, it took our economy into the tank.

So either Obama is lying about all of this, or the right is. How can you possibly know which is which? It's easy.

If the Democrats were actually right, then their solutions to our ailing economy would have worked. Instead, the opposite has occurred. They have used our economic crisis to engage in even more social engineering between healthcare, labor regulations, massive favortism to unions, and new financial regulations. And our economy is on life support. It in serious trouble. Real unemployment is well into double digits and shows no sign of easing. Yesterday's housing report on sales of new and existing homes was the worst in well over a decade. Every day, we are accruing debt at record levels. CNBC reported today that, according to at least one respected economist, we are now in a depression. Indeed, the word incompetent doesn't begin to describe this President and Congress.

This today from John Strossel discusses the current economic situation:

Why isn't the economy recovering? After previous recessions, unemployment didn't get stuck at close to 10 percent. If left alone, the economy can and does heal itself, as the mistakes of the previous inflationary boom are corrected.

The problem today is that the economy is not being left alone. Instead, it is haunted by uncertainty on a hundred fronts. When rules are unintelligible and unpredictable, when new workers are potential threats because of Labor Department regulations, businesses have little confidence to hire. President Obama's vaunted legislative record not only left entrepreneurs with the burden of bigger government, it also makes it impossible for them to accurately estimate the new burden.

In at least three big areas -- health insurance, financial regulation and taxes -- no one can know what will happen.

New intrusive rules for health insurance are yet to be written, and those rules will affect hiring, since most health insurance is provided by employers.

Thanks to the new 2,300 page Dodd-Frank finance regulatory act, The Wall Street Journal reports, there will be "no fewer than 243 new formal rule-makings by 11 different federal agencies." These as-yet unknown rules will govern lending to business and other key financial activity.

The George W. Bush tax cuts might be allowed to expire. But maybe not. Social Security and Medicare are dangerously shaky. Will Congress raise the payroll tax? A "distinguished" deficit commission is meeting. What will it do? Recommend a value-added tax?

Who knows? But few employers will commit to a big investment with those clouds hanging over our heads.

"As much as I might want to hire new salespeople, engineers and marketing staff in an effort to grow, I would be increasing my company's vulnerability to government," Michael Fleischer, president of Bogen Communications Inc., wrote in The Wall Street Journal.

Nothing more effectively freezes business in place than what economist and historian Robert Higgs calls "regime uncertainty."

"(A)ll of these unsettling possibilities and others of substantial significance must give pause to anyone considering a long-term investment, because any one of them has the potential to turn what seems to be a profitable investment into a big loser. In short, investors now face regime uncertainty to an extent that few have experienced in this country -- to find anything comparable, one must go back to the 1930s and 1940s, when the menacing clouds of the New Deal and World War II darkened the economic horizon."

Uncertainty created by Obama's legislative "successes" are comparable to the Depression and World War II? This does not bode well for job growth.

Higgs says: "Unless the government acts soon to resolve the looming uncertainties about the half-dozen greatest threats of policy harm to business, investors will remain for the most part on the sideline ... consuming wealth that might otherwise have been invested."

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Social Security & Fixing The Nation

Several days ago, I wrote that Social Security is a corrupt Ponzi scheme that needs to be turned into a national 401k system. Moreover, this is not 2005. America recognizes that our whole entitlement system and debt spending needs to be radically altered. It is why November is going to be a wave election. But while America gets it, neither Democrats, who are again demagouging the issue of Social Security, nor Republicans, who are cowering in fear of the demagogouery, get it. Two very good posts today, one from No Oil For Pacifists and a second from Another Black Conservative, touch on those issues.

This from No Oil For Pacifists:

Finally, page 14 summarizes the Social Security "gap": "Over the infinite horizon, the shortfall (unfunded obligation) amounts to $16.1 trillion in present value."

Conclusion: I'm not saying there's no risk associated with stocks and bonds. But at least you own them--you have no right to Social Security benefits, which can be changed or eliminated by future legislation. And would you invest in a corporation that admits it will lose money within five years and run out of capital just over 20 years later? Even a mediocre stock market may be better.

Simply put, Social Security is unsustainable. So, which is more prudent? Or the Ponzi Scheme? Which is the greater gamble?

(links omitted)

And Another Black Conservative takes note of what can be deduced from Chris Christie's ever increasing popularity in bluest of blue New Jersey:

If Chris Christie can make the hard choices in a blue state like New Jersey and not suffer from it, then national Republicans need not worry about making the hard choices when they take control of Congress. The American people have pretty much figured out that the bill for decades of reckless spending has come due. They are pretty much ready to take the harsh medicine needed to put our financial house in order. All that is required is a dose of honesty from Washington and change in the national narrative.

Amen

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Raising the Social Security Bogeyman

. . . [S]ome Republican leaders in Congress don’t seem to have learned any lessons from the past few years. They’re pushing to make privatizing Social Security a key part of their legislative agenda if they win a majority in Congress this fall. . . .

That agenda is wrong for seniors, it’s wrong for America, and I won’t let it happen. Not while I’m President. I’ll fight with everything I’ve got to stop those who would gamble your Social Security on Wall Street. Because you shouldn’t be worried that a sudden downturn in the stock market will put all you’ve worked so hard for – all you’ve earned – at risk. . . .

President Obama, Weekly Radio Address, 14 August 2010

The left is on a major push to scare the electorate in advance of the midterms with the bogeyman of 2005 - Republicans want to destroy Social Security. One, it is disingenuous to say the least, given how Soc. Security is being run and the problems it faces. Two, can this strategy possibly work in today's environment, when we face mounting deficits that could well destroy our nation?

First off . . . repeat after me . . . Social Security is the World's Biggest Ponzi Scheme.

Let's say that again . . . Social Security is the World's Biggest Ponzi Scheme.

Were anyone in the private sector running an investment the way Congress has run social security, they would be sharing a jail cell with Bernie Madoff.

We pay into Social Security every year of our working lives, but not a one of us has even a dollar of that money invested anywhere.

Every year, taxes are collected for Social Security. The Social Security Administration takes out of those taxes what it needs to pay out benefits that year. The rest goes into the general funds which a profligate Congress then immediately spends. In exchange, Social Security gets IOU's from Treasury in the form of non-negotiable bonds - i.e., they are bonds that the Social Security Administration can't sell on the open market; they can only be redeemed from Treasury. And when they do redeem them, Congress, having already spent the money received for the original bonds, must either take money from the the general funds or have Treasury borrow money from the public by issuing more debt - i.e., new bonds (with interest) on the open market. To top it off, the IOU's are not accounted against the federal budget deficit.

Update: A clearer explanation comes from at Karl Denninger at Market Ticker in the article, Revoke Paul Krugman's PhD:

This is similar to you coming to me with $100,000 and I "promise" to hold on to it for you and keep it "safe." I give you a promissory note to this effect. But I never hold the funds - I immediately go blow them on hookers, coke and limousines. You now have a bunch of IOUs, and I have no money.

Now perhaps I can manage to sell someone else some bonds when you come to redeem those IOUs. Perhaps. But what is unmistakable and true is that the money you allegedly "deposited" with me was immediately dissipated, not invested, saved, held or secured.

This little scheme seems to work just fine provided that each year the Social Security system takes in more than it spends on benefits - that is, so long as the file cabinet full of IOUs continues to get bigger. Treasury gets the appearance of "Free Money", Social Security is able to pay benefits, nobody's the wiser.

But it's a scam, because in point of fact the so-called "Special Bonds" are nothing more than a bare promise to pay and the asset against which they were issued (tax receipts) was instantly dissipated!

So what happens when Social Security starts to eat into that so-called "trust fund"? Immediately, Treasury needs to sell more debt. Ok, that sounds reasonable - but on what terms - that is, at what interest rate - will Treasury have to pay in order to sell that debt?

If you surmise that there's every possibility that we'll face a "Greece" moment long before 2037, you're correct. In fact, we could face that as soon as three or four years from now.

And like all ponzi schemes, Social Security will start to fall apart when the money coming in isn't enough to cover the current money being paid out. And we are there today. Already this year, Social Security is in the red $41 billion. It will soon be permanently and massively in the red as more baby boomers retire. Since all of their contributions to Social Security have already been spent, it means that payouts for Social Security will have to come from our taxes. The projected unfunded liability for Social Security is in excess of $7.7 trillion. (And to make this doubly scary, if you follow the link above, you will note that Social Security is the least of our entitlement problems. It is dwarfed by Medicaid and Medicare. I have no idea how much Obamacare is going to add to that unfunded liability, but if Massachussets is any indication, it will be substantial.)

Social Security is broken. Social Security is corrupt. Social Security and all of our entitlements must be fixed or they will destroy America.

Bush tried to fix Social Security in 2005 by privatizing it. That certainly would have permanently taken care of the unfunded liabilities problem. It would have taken away a large chunk of funds for Congress to blow every year - always a good thing. It would have left people actually owning the money they put into social security - perhaps the best part of it. And it would have made all Americans realize that they have a stake in businesses prospering in America.

Indeed, as to Obama's demagouging about the vagaries of the stock market, the simple truth is that what he is complaining of is the payout stream. That is something seperate and apart from the potential annual growth of each person's involuntary investment in Social Security. And indeed, in the private sector, people have the option of taking their retirement funds at the point of retirement and purchasing an annuity that will guarantee a steady income stream. There is no reason Soc. Security could not be run similarly - beyond the fact that it is, today, a Ponzi scheme.

As to growth during the years of people paying into Social Security, Obama is divorcing the importance of our economic growth from government hand outs. If businesses are prospering, then our economy is growing and Social Security payouts represent a pittance in growth on investment. If businesses and our economy are in the tank, then the only way the government can fund Social Security payouts at their current level is to raise taxes and / or print a lot more money - something which inevitably leads to inflation. Regardles, under each scenario describe above, all of us paying into Social Security are screwed.

Yet Obama demagouges the issue like the left did in 2005. It is easy to see why. One, the left's legislative record going into the midterm elections has America spitting blood. Two, Social Security was a winning issue in 2005 and Obama is hoping and praying for anything to distract from his record to date. Three, and most important by far, the left makes a living out of class warfare and demonizing businesses. The last thing they want is for everyone in America to realize that they have a stake in all businesses in America prospering. Most people are blinded to that today. But give them a stake in those businesses in the form of a dedicated Soc. Security account invested in a DOW Index Fund, for example, and the class warfare cannon fodder of today would soon become a nation of stock ticker reading investors who would not appreciate government interference in the markets.

None of that is acceptable to the left today, nor was it in 2005. They demagogued the issue in 2005, claiming that there was no problem with Social Security and that it would be solvent long into the future. Indeed, they refused to even engage with Bush in a bipartisan dialogue on the issue. They won - and then celebrated:



Bastards.

Paul Ryan, in his Roadmap For America, has put out a number of proposals for Social Security. He has floated the issue of privatizing social security and he has floated the proposal to change the age at which people become eligible for Social Security pay outs. Every Republican should jump on the Ryan bandwagon. It is a disgrace that only a few of our craven Congressional Congresscritters have done so. They are deathly afraid to touch this issue because of the how the left turned this issue nuclear in 2005. I think that our craven Congressional Republicans are not seeing the reality - we aren't in 2005 any more. Indeed, while we may only be five calendar years removed from 2005, given the degree to which our national paradigm has changed, it might as well be a century.

With the left's effort to use the Social Security bogeyman to gain traction on at least one issue going into the midterms, the far left punditry has sprung into action. Paul Krugman addressed the issue in his weekly column at the NYT. In it, he has the unbelievable chutzpah to say that critics of Social Security are acting in "bad faith:"

So where do claims of [a Social Security] crisis come from? To a large extent they rely on bad-faith accounting. In particular, they rely on an exercise in three-card monte in which the surpluses Social Security has been running for a quarter-century don’t count — because hey, the program doesn’t have any independent existence; it’s just part of the general federal budget — while future Social Security deficits are unacceptable — because hey, the program has to stand on its own.

Krugman is either incompetent or lying through his teeth in support of the left - or (my vote) both. Those "years of surpluses" in fact don't count. That is not "bad accounting." Those surplus funds were spent as soon as they were recieved. How do you think Clinton showed a budget surplus in his final years in office? He paid down the national debt with surplus funds from Social Security. Because the IOU's held by Social Security were accounted seperately, it created an illusory budget surplus. That, to every sane person, is bad accounting. No, actually it is worse. It is ENRON accounting.

Krugman is also pretending that Social Security operating massively in the red should not be an issue. This man is an utter charlatan. With deficits at historic levels and poised to go rapidly higher, Krugman's prevarication is criminal. As NRO notes:

Anyone who accuses critics of the Social Security trust-fund shell game of “bad-faith accounting” is running some serious flimflam of his own. The IOUs in the trust fund represent money that the government owes to itself. As long as the program remains as it is currently structured, that money has to come from somewhere: QED, higher taxes, fewer benefits, or some combination of both. To just pretend the problem doesn’t exist, however, is flimflam of the highest order. Only a master such as Krugman could say it with a straight face.

Jonah Goldberg wrote in an essay several weeks ago that the rules are changing. People in this bad economy are not looking for the government to solve their problems, but rather are demanding it get out of the way so that the people of America can solve them. The middle class is supposed to forever hold onto entitlements, but a vast majority of Americans want Obamacare repealed. I would add that unions, once popular in America, are now being seen by a majority as the penultimate leech on taxpayers. It is also becoming obvious that the race card is rapidly losing legitimacy - something that foreshadows disaster for the far left.

In this environment, I think Obama and the left's attempt to raise the spectre of the destruction of Social Security will ring hollow indeed to many Americans. And it only makes matters worse for the left when someone like Krugman comes out with a fire and brimstone missive based on patently false assertions. I have not seen any recent polls on this issue, but with Americans watching their economy fall apart, they are ripe to listen to reality. Thus I believe that if you ask Americans today whether it is time to substantively reform Social Security, seven in ten will say yes, and the majority will demand that it be done without raising taxes. I think Obama has latched onto an anchor issue - an anchor heading to the bottom of the electoral abyss. The rules have changed. Obama and the left just don't want to believe it. I have no problem with that. I only demand that Republicans realize it.

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Outrageous & Depressing Economic News

Accross the nation, public sector union workers in the states are making on average 25% more than their private sector counterparts. And perhaps the most lucrative place to be today is as a federal government employee. This from the USA Today:

At a time when workers' pay and benefits have stagnated, federal employees' average compensation has grown to more than double what private sector workers earn, a USA TODAY analysis finds.

Federal workers have been awarded bigger average pay and benefit increases than private employees for nine years in a row. The compensation gap between federal and private workers has doubled in the past decade.

Federal civil servants earned average pay and benefits of $123,049 in 2009 while private workers made $61,051 in total compensation, according to the Bureau of Economic Analysis.

In fairness, TNR makes the point that, when you adjust for variables such as education, then the gap closes. As to how much it closes, who knows, but the raw numbers themselves are damning. But regardless, we have seen a vast expansion of government workers at all levels, and particularly of federal government workers under Obama - with the number now cresting 2.15 million. The simple fact is that none of these people create a dollar for our economy. It is only the private sector that creates the wealth of America. And when we expand the federal government work force ever more, we are both shrinking the size of the pool of private sector employees and shrinking our tax base.

And then, of course, there are the retirement issues, where the confluence of public sector unions and scurrilous politicians who have underfunded pension committments have helped bring our nation to the brink of catastrophe. As the NYT noted:

Pew estimated a $1 trillion gap as of fiscal 2008 between what states had promised workers in the way of retiree pension, health care and other benefits and the money they currently had to pay for it all. And some economists say that Pew is too conservative and the problem is two or three times as large.

So a question of extraordinary financial, political, legal and moral complexity emerges, something that every one of us will be taking into town meetings and voting booths for years to come: Given how wrong past pension projections were, who should pay to fill the 13-figure financing gap? . . .

Who indeed? As it stands now, public sector unions are determined to soak American taxpayers for every possible dollar. And, as we have recently seen with an act of Grand Theft Democrat, our federal government is fully complicit in the corruption.

I think it clear that the one lesson to come out of all of this is that we need to tighten the laws significantly for funding defined benefit pension plans, particularly for the public sector and unions. Moreover, there should be a real push to move from defined benefit pension plans in the public sector and into 401k plans. The simple fact is that, if our economy can't sustain enough growth to allow for reasonable retirement on defined contribution plans, then we will be funding defined benefit plans either by printing dollars by the bushelload, thus leading to significant inflation, or by taxing the private sector to the point of killing the golden goose. We will further have a generation of Americans on the verge of revolution - and starvation.

The same concepts apply to Social Security - a program that has been run as a Ponzi scheme for decades. People who have paid into social secuirty all of their life will perhaps be surprised to find that the money they paid in went out the door upon as soon as our government got its greedy paws on it. This provides the double whammy - the bill has now come due on this Ponzi scheme, with outlays already in excess of annual inflow from taxes. Social Security is also a defined benefit plan, so that if you make promises while at the same time destroying our economy - well, its off to the printing presses. And the left demagogoues the issue of social security, wanting to sustain the unsustainable. Just amazing.

But even on the 401k front, the news looks bad indeed. Megan McArdle at the Atlantic has a depressing article, arguing that stocks are significantly overvalued today and we will likely see substanitally less growth in the stock market over the coming decade.

If the return on equities really has fallen, this decline poses a big problem for the average investor who planned to stick 5 to 10 percent of his or her annual income into stock funds and retire comfortably. At an annual inflation-adjusted growth rate of 8 percent, savings of just 5 percent of your income for 30 years will leave you with a nest egg big enough to replace almost half your income when you retire. Saving 10 percent will make you really comfortable.

But if the return is 2 to 3 percent, you’ll need to save close to 40 percent to replace almost half of your income. And a 2 percent return seems to be a real possibility—in fact, it’s a hair above the 1.8 percent that Smithers & Co., an asset-allocation consultancy, forecast for U.S. equities over the next decade.

Felix Salmon, a finance blogger, argues that with stocks showing both lackluster prospects and whiplash-inducing price swings, investors might want to get out of the market entirely. That conclusion is tempting: if a quarter of Americans are expecting bubble-grade growth in stock prices, mightn’t another correction be in the offing? . . .

Even more depressing is the assessment of Keith R. McCullough, CEO of the research firm Hedgeye. This from Mr. McCullough writing in Fortune magazine:

. . . Despite the many differences between Japan and the US, there is one similarity that continues to matter most in the risk management model my colleagues and I use at Hedgeye, our research firm -- debt as a percentage of GDP. Now that the US can't cut interest rates any lower, the only option left on the table is what the Fed just announced it would start doing -- buying Treasury debt. And that could lead the country to the brink of collapse: According to economists Carmen Reinhart & Ken Rogoff, whose views we share, crossing the 90% debt/GDP threshold is the equivalent of crossing the proverbial Rubicon of economic growth. It's a point from which it's almost impossible to return.

On July 2nd, we cut both our third quarter 2010 and full year 2011 GDP estimates for the US to 1.7%. At the time, the consensus around US economic growth estimates was about 3%. Now we're starting to see both big brokerage analysts and the Federal Reserve gradually cut their GDP estimates, but not by enough. Even our estimate for 2011 is still too high. . . .

With 40.8 million Americans on food stamps (record high) and 45% of the unemployed having been seeking employment for 27 weeks or more (record high), what's left if (or when) QE2 doesn't kick start GDP growth? Should we start begging for QE3? Should we cancel the bomb of the National Association of Realtors' existing home sales report, scheduled for public release on August 24th? Or should we bite the bullet and accept that current economic policy dictates 0% returns-on-savings, even as Washington continues to lever-up our future to the point of economic collapse?

Before the Fiat Fools -- Hedgeye's name for political actors and bankers who have placed their hopes of economic recovery in printing endless supplies of new cash -- run out campaigning for QE3, maybe they should analyze some real time market results to yesterday's announcement of QE2:

1)The US dollar is battling for resuscitation after 9 consecutive down weeks -- down 9% since June.

2) US Treasury yields are making record lows on the short end of the curve, with 2-year yields striking 0.49%.

3) The yield spread (in this case the difference in return between 10-year and 2-year Treasury bills, which shows a long-term confidence when high) continues to collapse, down another 4 basis point day-over-day to 223 basis points.

4) The S&P 500 is down below its 200-day moving average (a common signpost for the health of a market or stock) of 1115.

5) US Volatility (VIX) is spiking from its recent stability.

6) In Japan, long time quantitative easing specialists found their markets closing down overnight by 2.7%, which makes them down 11.9% for the year to date.

Lest our doom and gloom seem built entirely on technical measurements, what they boil down to is actually quite simple -- an idea about our country which dates back to 1835. Alexis De Tocqueville, author of Democracy in America, which was published that year, seemed to warn of this day when he wrote: "The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."

And yet Obama, still refusing to admit that his Keynesian policies are now proven failures, continues to mount up our debt at an unheard of pace. This from the WSJ:

The U.S. government spent itself deeper into the red last month, paying nearly $20 billion in interest on debt and an additional $9.8 billion to help unemployed Americans.

Federal spending eclipsed revenue for the 22nd straight time, the Treasury Department said Wednesday. The $165.04 billion deficit, while a bit smaller than the $169.5 billion shortfall expected by economists polled by Dow Jones Newswires, was the second highest for the month on record. . . .

Years of deficit spending by Washington have led to a mounting national debt. Interest payments so far in fiscal 2010 amount to $185.25 billion; by contrast, corporate taxes collected by the government during the same 10 months were $139.71 billion. Interest payments in July alone were $19.9 billion.

And if that wasn't bad enough for you:

The Commerce Department reported Wednesday that the U.S. trade gap had hit its highest level since October 2008. Exports declined and imports increased to a record high as the trade deficit expanded to $49.9 billion, an 18.8 percent increase in June compared to May. Imports grew 3 percent while exports dropped 1.3 percent, the most since April 2009, the Commerce Department reported Wednesday.

We are a nation sinking under the weight of an entitlement system out of control and an utterly profligate administration more incompetent than that of Herbert Hoover.

So what is the administration doing about all of this? The great class warriors of the left, with Obama leading the way, are intent on letting the Bush tax cuts expire, regardless of the effect on the economy:

Republicans accuse Democrats of plotting one of the biggest tax hikes in American history, arguing that raising taxes on wealthy households would punish the very people capable of creating jobs, spurring economic growth and reducing the 9.5 percent unemployment rate. About half of all small-business income is reported on the individual returns of people making over $250,000 a year, according to the taxation committee's data, though those taxpayers represent only about 3 percent of small businesses.

Meanwhile, in the face of all of this, John Kerry, the man who was last seen skipping out on his state taxes, is still pushing to saddle our near dead economy with cap and trade legislation. Well, that really would be the final nail in our economic coffin if they were ever able to get it through. Though, that said, the EPA is already starting to impose carbon regulations - based on the ruling of the Supreme Court, not any action by our legislature. Consider it regulation without representation.

At any rate, there is at least one bright spot in this otherwise day of very depressing economic news. Obama, still on his "recovery summer" promotion tour, announced the other day that the "worst of the recession" is over. Don't you feel better knowing that. Nothing to see here, move on.

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Can I Have The BS On Rye, Hold The Mayo?

If you have never been over to visit Afrocity's blog at Augographed Letter Signed, you really ought to treat yourself. She describes herself as an "archivist, bibliophile, adjunct professor and historian" as well as "a 30 something professional who had been a “Good African American Democrat ” all of my life until the election of 2008." She only posts once a week on Sundays, but her essays are always thought provoking and, when dealing with issues in her personal life, invariably poignant. She is as interesting and as complex a person as you will meet on the internet.

Afrocity's post this week, Bullshit, It's Not Just For Republicans Anymore. Here is a snippet:

. . . But understand that bullshit is an acquired taste. That is to say, if someone feeds you crap election year in and election year out, you only know… well…crap. You become accustomed to the broken promises and pointing fingers game. You accept your permanent place in the war of America’s needy versus America’s greedy. Despite your inner brilliance- your wiser conscious plea to ask questions and get real answers, you continue to eat the plate of bullshit set before you. Some like myself ate with small spoonfuls -drinking huge glasses of water between each swallow. Others like my mother and most Obama supporters put the feedbag on with gusto.

The day I woke up and took a much needed shower, was the day the bullshit became not a meal for my liberal friends but something to throw at me.

Friend: Afrocity how can you turn your back on everything the Democrats have done for black people”

Afrocity: Like………….

You see Afrocity does not play the bullshit game anymore. Give the donkeys their breast cancer hued pink slip.

Heh. I really do like this woman. Do pay her a visit. And do read her post in conjunction with the post below, "Pre-Revolutionary America." It would seem that America as a whole is running out of patience with the bullshit.

Examples of bullshit being doled by the current administration out are everywhere. There is Obama's jobs saved or created canard. There is Obama's fiction that he is controlling our borders better than previous administrations - something with which virtually the entire membership of the Immigration and Customs Enforcement Office apparently disagrees. There is a gay federal judge ruling that seven million Californians were bigoted and irrational when they voted against gay marriage. And then there is the massive, potentially economy busting fiction that Obamacare is going to lower the cost of our entitlements. The Chief Actuary of Medicare has refused to sign onto the fiction. This from Q&O:

You remember last week when the supposed “good news” was released – Social Security wasn’t in as dire shape as we’d been told and Medicare was going to be fine too? Yeah, since ObamaCare passed and the doc fix was sure to be implemented, not to mention the half trillion in cuts to Medicare, why we were on the road not only to solvency but to deficit reduction.

And the yearly bit of political theater played out as planned:

The normal process with the annual Trustees’ Reports is for the Trustees to develop and publish the best available projections for the future finances of Social Security and Medicare. The respective Social Security and Medicare actuaries then sign a pro forma blessing of those projections, which is tacked to the back of the report when released to the public.

“Pro forma” is the key. Usually, whether they believe the rosy projections or not, their signatures appear on the report.

But this year, one of them just couldn’t do it in good conscience. The Medicare Chief Actuary just couldn’t sign his name to the fiction without adding a memo of his own.

The actuary’s alternative memo explains that “the projections in the report do not represent the ‘best estimate’ of actual future Medicare expenditures.” Worse than that, they are not even in the ballpark of reasonability. The official 2010 Trustees’ Report tells us that total Medicare expenses will be total 6.37% of GDP by 2080. The CMS actuary’s alternative memorandum explains that 10.70% of GDP is a more reasonable estimate for that year – though one that is roughly 68% higher.

The two reasons the actuary cites are the “doc fix” – a formula the actuary describes as "clearly unworkable and almost certain to be overridden by Congress” (both the Obama administration and leaders in Congress are on record opposing them – yet there they are in the report on the “plus” side of the ledger).

The other assumption the actuary dismisses as unrealistic is the assumption that future program cost will be contained by “downward adjustments in annual price updates reflecting in turn the assumption that health service productivity growth will parallel “economy-wide productivity.” The actuary flatly states there is no evidence to support this assumption and, on the contrary, much to call it deeply into question.

E21 notes:

This is a key point; the glowingly optimistic projections in the official Trustees’ Report assume that we as a nation will be content to have 40% of our medical facilities go under within the next 40 years, and that we will happily accept these severe constraints upon beneficiaries’ access to health care. If that is not in fact the societal will after the enactment of health care reform, then the official cost estimates should be tossed into the nearest receptacle.

Bad though all of this is, none of it is actually the worst gimmick in the official report’s advertised improvement in Medicare solvency. That involves the double-counting of Medicare savings. Earlier this year, Congress passed a health care bill containing various new Medicare taxes and constraints on program expenditures. Such savings are assumed in the official report to extend the solvency of Medicare. But Congress chose instead to spend the savings on a new health care entitlement.

Do read the entire post.

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Obama Leads The Progressive Left Across The Rubicon (Updated)

Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.

Sir Winston Churchill, Speech in November 1942

President Obama has crossed the Rubicon with the health care vote. The bill was not really about medicine; after all, a moderately priced, relatively small federal program could offer the poorer not now insured, presently not on Medicare or state programs like Medicaid or Medical, a basic medical plan.

We have no interest in stopping trial lawyers from milking the system for billions. And we don’t want to address in any meaningful way the individual’s responsibility in some cases (drink, drugs, violence, dangerous sex, bad diet, sloth, etc.) for costly and chronic health procedures.

No, instead, the bill was about assuming a massive portion of the private sector, hiring tens of thousands of loyal, compliant new employees, staffing new departments with new technocrats, and feeling wonderful that we “are leveling the playing field” and have achieved another Civil Rights landmark law . . .

Victor Davis Hanson, We've Crossed The Rubicon, PJM, 21 March, 2010

On Saturday night, we were a nation in deep trouble. We had a national debt of $12,676,374,186,522.00 - and were hemorrhaging billions in red ink daily. Unemployment/underemployment was well over 16% and was not forecast to get better during the coming year. We were still in the midst of the worst recession in our nation since the Great Depression - a recession itself brought on by Democrat social engineering of lending standards and a massive market distortion caused by Fannie and Freddie. (Update: The WSJ reports today that personal incomes contracted in the past year) Social Security, run as a ponzi scheme by a rapacious Congress for years and protected at all costs by Democrats, faced a huge problem of solvency (Update: with the insolvency starting this year) - dwarfed only by the massive unfunded liabilities looming in Medicare/Medicaid. And our ability to borrow to finance Obama's world record spending spree was rapidly deteriorating. Not only was our AAA rating for government securities in danger, but the market had already weighed in. "Two-year notes sold by the . . . Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity." Indeed, so serious are our economic woes that the "latest Fox News poll finds that 79 percent of voters think it’s possible the economy could collapse, including large majorities of Democrats (72 percent), Republicans (84 percent) and independents (80 percent)." Moreover, the same poll finds that three times as many individuals, some 64%, see our national debt as a greater threat to our nation than terrorism. In short, we were, on Saturday night, in a very bad situation. And then, Sunday night, Obama and the progressive left managed to make a bad situation exponentially worse.

On Sunday night, the progressive pulled out all of the stops to pass Obamacare, taking over, directly and indirectly, one sixth of our economy (voting roll here). Instead of addressing the looming disaster of Social Security and Medicare - indeed, instead of addressing unemployment and an economy in deep distress - Obama added on top of our failing entitlement programs the biggest entitlement program of them all. And Obamacare comes replete with massive new taxes, including taxes on investment income, unfunded state mandates that will mean higher state taxes, and the assurance of skyrocketing insurance premiums. As to our national debt, Douglas Holtz-Eakin, former head of the CBO, explained the massive additions to our debt that we can expect as a result of this bill's passage.

The IRS will now expand massively as the designated arm of the state to enforce Obamacare. They will shortly begin hiring the 16,000 new agents needed to enforce the mandatory purchase of health insurance by all Americans. Over one hundred new bureaucratic offices are about to be created, all to oversee our Obamacare. As summed up by NRO, the vote last night “will increase taxes, increase premiums, and increase debt, while decreasing economic growth, job growth, and the quality of health care.” And the people are not fooled. When polled by CBS as to whether the health care plan pushed by Obama and the left was motivated by political concerns or actual concerns with health care - the majority, and even a majority of Democrats, 57%, answered that it was motivated by politics.

It is not enough to now simply say that our government runs our health care system. To give full credit where it is due, the Democrats now own it. Let's never let anyone forget that salient fact.

It looked for awhile like Bart Stupak and a handful of pro-life Democrats might hold out against language in the Senate bill that was so crafted as to allow for federal financing of abortions. Ultimately, Stupak caved in under intense pressure and with the promise that Obama would sign an executive order directing that no financing would go for abortions. An executive order does not trump the plain language of Congressional legislation. Indeed, a Court interpreting the law would likely only acknowledge the executive order in a footnote to its decision, if at all. You can bet your bottom dollar that, when the mandates become operative in a few years, there will be a law suit forcing the issue - and a court with any intellectual integrity will require that the government provide federal funding of abortion. The reality is that federal funding of abortion through Obamacare is now virtually inevitable.

Obama stated in remarks after the vote:

This is what change looks like. . . . We proved that this government — a government of the people and by the people — still works for the people.

Is Orwell now Obama's speechwriter? Health care played no role in causing our economic downturn - yet Obama pretended that it was at the heart of the problem. The plan designed by the progressive left does nothing to bend down the inflation of health care costs - yet it was sold on the basis of sound fiscal policy (Update: James Pethokoukis of Reuters no less calls it Faith Based Deficit Reduction; see also the post above, wherein Krauthammer forecasts an Obama attempt to impose a regressive VAT tax in order to fund Obamacare). Not a single poll showed that a majority of the people wanted this monstrosity - yet Obama claims a popular mandate. This was not a bill passed on its merits - it was progressive sausage made with toxic, backroom deals. All that last night proved was that the progressive left are power hungry statists willing to say and do anything in order to amass power. This is not a government that works for the people - it's a political elite that wants to control the people and punish wealth creation.

Megan McArdle, herself a throwback to old times - an intellectually honest, if a bit misguided, Democrat - summed up her thoughts at the Atlantic:

What I hope is that the Democrats take a beating at the ballot box and rethink their contempt for those mouth-breathing illiterates in the electorate. I hope Obama gets his wish to be a one-term president who passed health care. Not because I think I will like his opponent--I very much doubt that I will support much of anything Obama's opponent says. But because politicians shouldn't feel that the best route to electoral success is to lie to the voters, and then ignore them.

As Bill Kristol points out, this is by no means over, even now. Republicans are planning a series of parliamentary procedural moves that may yet impact final passage of proposed changes to the bill. But the real challenge lays in the upcoming elections. "[W]hat Republicans have to do is to make the 2010 and the 2012 elections referenda on Obamacare, win those elections, and then repeal Obamacare." Truer words were never spoken.

James Fallows, on the other hand, writing at the Atlantic thinks that "this will not seem anywhere near as poisonous seven months from now as it does today." He is living in a dream world if he thinks, after the election of Brown to Kennedy's seat in blue Mass., after the birth of the Tea Party movement so maligned out of fear by the left, this will all blow over. At the Politico, they speculate as to which Democrat seats are now in danger as a result of their vote last night on health care. No need to speculate. The answer is every damn one of them.

Even John McCain has put the left on notice that they should not expect any cooperation in Congress from the right after their actions of the past year:

"There will be no cooperation for the rest of the year," McCain said during an interview Monday on an Arizona radio affiliate. "They have poisoned the well in what they've done and how they've done it."

No, they didn't just poison the well, they urinated in it. And we really should go one further than McCain. If you hear anyone mention the word "bipartisan" again, in any suggesting that the Republicans should cooperate with the Obama administration, the only appropriate response is a swift and powerful kick to the groin. Repeat as necessary until the person expressing this obscenity has undergone a complete and permanent attitude adjustment.

While it will be several years before the full weight of Obamacare will be felt, some of the provisions, including ones directly attacking the health insurance industry, kick in immediately. One is a change to the acceptable ratio of payments to benefits that has long been the health insurance industry standard. The health care plan signed into law changes the acceptable ratio from 65/35 to to 85/15. In a stroke, Obama has destroyed the ability of health insurance companies to pay overhead, salaries and make a modicum of profit. In addition, the new health care bill includes a 40% rise in taxes on health insurance companies - which also must be paid from the 15. The net effect of this war on our health insurance industry will be a massive increase in premiums next January, when most plans renew, and a massive contraction of the health insurance industry as many, if not all, medium and small insurers, are forced from the market. This from a transcript of Rush Limbaugh's show on Tuesday, wherein a health insurance employee highlighted the impact of the newly passed bill:

. . .

CALLER: Okay. For time immemorial, both state and federal regulation -- and also just the industry standard -- has been a 65-45 percentage arrangement: 65 in claims payment and 45 for administration and claims expense. Withholding that you store for, you know, a major catastrophe or something.

RUSH: This is to pay your claims?

CALLER: No, 65% is to pay the claims. Thirty-five percent is for everything else.

RUSH: That means 35% is salaries, administration costs, and the offices, all the paperwork, that kind of thing?

CALLER: It's that as well as, you know, we are required to keep a certain amount of cash on hand as a percentage of our claims exposure to pay claims. . . .

RUSH: Now, I just want to make sure I understand here. State and federal regulations set those percentages?

CALLER: State and federal regulations, yes.

RUSH: So if you wanted to have 85% set aside for claims, you couldn't. You had to go at 65%?

CALLER: Exactly.

RUSH: If you wanted 30% set aside for claims and the rest were administration, you couldn't do it. It had to be 65%.

CALLER: That's illegal, yes. It has to be 65-35, and there's a couple of percentage either way, but generally when an insurance company falls outside of those guidelines, they are considered financially unstable.

RUSH: Well, who audits you all to make sure you are within the ratio?

CALLER: We're audited by the state insurance departments, primarily. There are some plans that are audited both state and federally, and then you have your private auditors who will come in as part of the stock market and that kind of thing. So we're audited often.
. . .
CALLER: . . . So what Obama just did an hour and a half ago is make every insurance company in the country financially unstable. Remember, the 15% that we are left has not only to pay salaries, maintenance, upkeep of buildings; it also has to pay the 40% increased taxes that we've got. I mean, there's just no way. You can't do it.

RUSH: Well, you're getting a little bit ahead of me here. What did Obama sign that changes this 65-45 split? In what way did Obama now sign you into permanent instability?

CALLER: The provision in the Senate bill requires that all insurance companies pay 85% of premiums collected every year in claims.

RUSH: So the 65 is now 85?

CALLER: Exactly. It doesn't matter how much we increase the premium, it won't matter.

. . .

Rush: . . . You originally thought that your industry would survive. You're speaking industry or just your particular company?

CALLER: I would say 99% of all insurance companies, health insurance companies in the country.

RUSH: Okay. So you originally thought you might have three to five years to stay in business under Obama. Now you said it's two to three. Why?

CALLER: Because of the 85-15. Plus the additional expenses were going to incur. Additionally, the mandates, what people don't understand when CMS (which is the Centers for Medicaid and Medicare) push a mandate down on insurance companies, we have to pay to complement those mandates. We don't know how many of those are in this monstrosity. So we can have our mandate budget doubled, our taxes already up 40% or whatever it is, and our cash flow immediately cut.

RUSH: Well, how can you know in advance of paying any claims? Because they've now shifted to 65% that you have to set aside for claims to 85%. How in the world can anybody know in advance of paying claims that it's going to amount to 85%?

CALLER: Well --

RUSH: Of course 65%? It seems to be like this is a ridiculous dictate made by people that have no clue how your business works.

CALLER: Well, they don't have a clue. But the way that that amount of money is calculated is you look at the past year, past five years, past ten years, and you see what your claims expense have been those years. Then based on your enrollment and your demographics you project forward into what you expect to be paying in the future, in the next year and the next five years. So you can do that. It's not precise to a dollar, but you usually get pretty close. What he's done is by saying, for example, the preventative services now --

RUSH: Those are free. Those are, quote, unquote, "free."

CALLER: Yeah, exactly.

RUSH: What the hell is a preventative service covered by an insurance company anyway?

CALLER: Well, that would be your colonoscopies, your mammograms, your yearly physicals, your lab work.

RUSH: Oh, so those are free now! So if I want to go get a colonoscopy today and I have an insurance policy, I'm not going to pay for it?

CALLER: Exactly.

RUSH: But you will.

CALLER: Well, we will. We'll pay out the nose for it.

RUSH: (laughing) Well...

CALLER: I know, bad analogy. I'm sorry.

RUSH: It is Christmas!

CALLER: But, Rush --

RUSH: Well, no, I don't look at a colonoscopy as Christmas. Don't misunderstand. . . . But it is Christmas in the sense that I'm not paying for it. I don't know how you can stay in business even two to three years with this kind of thing happening to you this year alone.

CALLER: I don't think we will and that's why I am seriously considering leaving this industry. I'm updating my resume. You know, people who I work with -- even people who voted for Obama and thought he was the greatest thing since sliced bread -- are shell-shocked.

RUSH: That just frustrates the hell out of me. Anybody with a brain has no reason to be shell-shocked about who this guy is, but it is what it is.
. . .
CALLER: And you know how many people are going to die in the interim, Rush? I say that in all sincerity, because come January 1st you're going to see 200, 300% increases in premiums and people are going to drop their coverage. So you've got the woman who isn't going to go get the mammogram or the man who's not going to get the prostate exam.

RUSH: Wait a minute!

CALLER: People are going to die.

RUSH: I thought the mammogram was free.

CALLER: Not when you drop the coverage because you can't afford three times the premium. Remember, the premiums are going up because of the government, and jobs are being lost because of the government. If you can't pay it, you can't pay it. So people are going to drop it. They're going to drop their insurance before they drop their mortgage.

RUSH: They're going to be clamoring to the government to fix the mean-spirited insurance companies for raising the prices so high and that's where Obama's going to step in and say, "You know what? We have no choice here but than to do it ourselves," and then you get dumped on again first and foremost with Obama portraying the government as the savior. . . .

Read the entire transcript.

When Julius Caseser crossed the Rubicon river in 49 B.C., entering into Roman territory, it marked both a crossing of the point of no return and a declaration of war on the Republic. The end result was ultimately the destruction of Rome's Republican form of government. I think the analogy here is apt. Obama has so polarized politics in our government, it is questionable when or if we will see a return to rational, measured politics until either conservatism or progressivism wins out and the other is pushed into the dustbin of history. We are, as I blogged here, in a zero sum ideological war today. Never in history has the political system been so manipulated and in such a highly partisan fashion. Its provisions, mandating each person purchase health insurance, if upheld, will represent a vast expansion of the government's power to control and direct our lives. But even beyond all of that, this bill threatens not merely our health care system, but it also poses a clear and present danger to the fiscal viability of our nation.

In the end, the right must not merely repeal Obamacare, but it must present a better alternative. In that respect, Paul Ryan may in fact have the answer to Obamacare, as well as the problems of Medicare and Social Security. His "Roadmap" is a very serious attempt to address the actual problems we face. Here is hoping that Congressman Ryan is a player in 2012.

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Portrait Of A Fiscal Hawk

Fortune Magazine has a good article on Rep. Paul Ryan - a Congressman who recently arrived on the national stage with his articulate criticism of Obama's health care plans. The article discusses Ryan's economic plans to put America back on a sound - and sane - fiscal footing.:

What is the Ryan plan , and why is the Obama administration seemingly obsessed with it? Ryan calls his proposal, published in January, the Roadmap for America's Future. It's a remarkably comprehensive, daring manifesto that tackles every part of the budget on a presidential scale, from Social Security to tax policy to health-care reform.

The goal is to eliminate the deficit, and eventually all federal debt, without any crippling tax increases. Under Ryan's plan, for example, federal spending would reach just 24% of GDP in 2035 and then fall, vs. the CBO's projection of 34% and rising from there. Ryan would make the deficit disappear by mid-century. . . .

Do read the whole article. Ryan, like Chris Christie, are people to watch as the Dems promise to lead us down an insane fiscal path - until 2012.

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The Orwell-Obama-Hoyer Pay As You Go Legislation

Democrats won't be the party of deficits.

Rep. Steny Hoyer (D-Md), Congress Must Pay for What It Spends, WSJ, 25 June 2009

To see Democrats at their most Orwellian, no need to go further today than Steny Hoyer in the WSJ, shilling for Obama's "pay-go" legislation and blaming all deficits on a combination of profligate Bush spending and "reckless" Bush tax cuts. As the Wall St. Journal's senior economic writer, Stephen Moore, explained in a recent interview:

President Obama can read the opinion polls, and he is seeing what we've been talking about every night, which is the American people are absolutely incensed about the debt that's going on in this country. And so now President Obama is trying to sound like a born-again deficit hawk.

The difference between Obama's words and deeds is a vast and yawning chasm. It is true that the greatest sin of post-Reagan era Republicans has been to jettison fiscal discipline. It is a fundamental failure that has allowed the left to paint Republicans as hypocrites. But for the left to claim the mantle of "fiscal discipline" for themselves is to pass beyond the bounds of any reasonable definition of the word "hypocrisy" and enter into Orwellian space. But that is precisely where Hoyer, on behalf of Obama, takes us today.

The Hoyer article deserves a full roasting, so here goes.

In recent years, America's fiscal story has been one of steady decline -- from record surpluses to record deficits. In 2001, the federal government had a projected 10-year surplus of $5.6 trillion. Today, we are looking at a fiscal year 2009 deficit of $1.7 trillion.

"Steady decline?" In other words, today's multi-trillion dollar deficit is the natural evolution of the Bush years? The actual budget deficit in 2006, before Pelosi, Reid and the Democrats took control of the purse strings, was $248 billion. The only way you go from that to a $1.75 trillion deficit in 2009 and describe it as a "steady decline" is to redefine the word "steady" to mean "fell off a cliff."

Further, the Clinton surplus was the function of an accounting gimmick with Social Security enacted during the 90's. Social Security surpluses of those years - and continuing through today - were used to buy government bonds, thus making the annual revenues a part of the general funds of Congress (and that a profligate Congress spent wholesale every year). It was and is a vast Ponzi scheme. Our actual national debt increased every year under Clinton. Social Security is now a time bomb set to blow up because the left in Congress refused to do anything about it. The huge number of baby boomers who gave the government the illusion of surpluses in the Clinton years are starting to make claims on the system that will steadily grow and overwhelm the system in just a few years.

A number of factors have brought us to this cash-strapped point, including reckless tax cuts, the cost of two wars, entitlement programs that have grown on autopilot, and the necessary, though costly, efforts to get our economy out of recession.

Wow. There is not a shred of intellectual honesty in that sentence.

1. Bush's tax cuts not only raised tax revenues because of an expanding tax base, they did so at the greatest rate in our nations history.


That was completely predictable from the historical data we have on the effect of tax cuts on the American economy during the 1920's, 60's and 80's..

2. The cost of the two wars we are fighting added to our deficit, but pale in comparison to real culprit, the growth in domestic spending. To put this in perspective, the total cost of the Iraq War from 2003 to 2008 was $551 billion dollars. Obama quadrupled that in his first hundred days with massive domestic spending - which, as an important aside, he did at the cost of our national defense. His budget reduces defense-related R&D, cuts major weapons systems, cuts missile defense, and holds defense spending below inflation, resulting in an ever-shrinking defense budget. As Michael O'Hanlon wrote in the Washington Post:

After three months of very impressive decisions regarding national security, President Obama made perhaps his first significant mistake. It concerns the defense budget, where his plans are insufficient to support the national security establishment over the next five years.

The truth of our deficits is ever increasing profligate spending above tax receipts on the domestic front - something Obama has just put on steroids.

3. The entitlement programs didn't grow on auto-pilot. "Auto-pilot" suggests that no one has attempted to curb the growth. The truth is that Steny Hoyer and the left beat back every attempt at reforming Social Security. Does this look like "auto-pilot" to you.



4. The massive spending by Obama was not "necessary" to get our economy out of recession. It was a choice the left made to fund every liberal special interest program they could think of under the rubric of Keynesian economics. Other alternatives to stimulate the economy were equally viable, but none offered the left a chance to go hog wild at the public trough.

But by far the worst decision was the abandonment in the Bush years of the principle that our country should pay for what it buys. It's time to learn from that error and establish that principle in law. President Obama has made the pay-as-you-go rule -- a.k.a. "paygo" -- a central part of his campaign for fiscal responsibility. Under paygo, Congress is compelled to find savings for the dollars it spends.

This is a joke, right? True, Bush and the Republican Congress deserve opprobrium for their lack of fiscal discipline. But their lack of discipline is infinitesimal compared to Obama and the far left who control Congress and the purse strings today. In this instance, a WaPo graph is worth nine trillion words:


The truth is that this pay-go legislation is a penultimate act of political cynicism. Its the left trying to cover-up their Obama Gone Wild spending spree by turning reality on its head. There are two truths to this snake oil Steny Hoyer is peddling. The "pay-go" legislation Hoyer is hawking specifically exempts Obama's multi-trillion dollar pet projects from its restrictions. It will provide cover for the largest planned expansion of spending and borrowing in our nation's history. It's only practical effect beyond pure propaganda for Obama will be to make tax cuts a thing of the past.

In the 1990s, paygo proved to be one of our most valuable tools for climbing out of a budgetary hole. As President Obama put it earlier this month, "It is no coincidence that this rule was in place when we moved . . . to record surpluses in the 1990s -- and that when this rule was abandoned, we returned to record deficits that doubled the national debt."

President George W. Bush and the Republican Congress set paygo aside, turning borrowed money into massive tax cuts for the most privileged. Borrowing made those tax cuts politically pain-free as long as Mr. Bush was in office, but it only passed the bill on to the next generation -- along with ever-inflating interest payments.

As I indicated above, a good part of the budget "surpluses" of the 1990's were nothing more than accounting changes that, in essence, made of Social Security a ponzi scheme. To the extent there was any fiscal discipline, it was the discipline imposed by Newt Gingrich and the House on the Clinton administration. As discussed in the quote below, pay-go legislation played little if any role in imposing fiscal discipline during the 90's as it was regularly ignored under House rules.

Pay-go was terminated in 2001 to allow for the Bush tax cuts - and you can see the result in the graph above. We didn't lose revenues, we gained them on a historic scale. Yet under pay-go, the math would have ignored this historical certainty and required massive cuts in spending to enact the tax cuts. Pay-go, since revived by Pelosi as a House rule in 2007, has been equally ineffective. It has been regularly ignored whenever convenient for Democrats - such as, for example, when passing Obama's massive 9,000 ear-mark strong "stimulus" package. This from Brian Riedl at the Heritage Foundation:

PAYGO has proven to be more of a talking point than an actual tool for budget discipline. During the 1991-2002 round of statutory PAYGO, Congress and the President still added more than $700 billion to the budget deficit and simply cancelled every single sequestration. Since the 2007 creation of the PAYGO rule, Congress has waived it numerous times and added $600 billion to the deficit.

Creating a PAYGO law and then blocking its enforcement is inconsistent and hypocritical. And given their recent waiving of PAYGO to pass a $1.1 trillion stimulus bill, there is no reason to believe the current Congress and the President are any more likely to enforce PAYGO than their predecessors were. And even if it were enforced, PAYGO applies to only a small fraction of federal spending (new entitlements). Consequently, PAYGO is merely a distraction from real budget reforms that could rein in runaway spending and budget deficits.

You can read the rest of Mr. Hoyer's Orwellian scratchings here. Pay-go legislation really is political cynicism taken to its zenith. And neither Steny Hoyer nor Obama display the least bit of intellectual honesty in pushing it as political cover for an experiment in deficit spending that could truly doom our economy.

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