Category Archives: political economy

Debt Ceiling Negotiations

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President Barack Obama had some thoughts on this in a press conference the other day.  Surprise—I have some thoughts on his thoughts.

Obama said this in response to a question from CBS News‘ Major Garrett on how Obama reconciles his refusal to vote to raise the debt ceiling while a Senator (the raise would be a “leadership failure”) with his current refusal, as President, to negotiate his demanded raise of the debt ceiling:

And, you know, the fact of the matter is, is that we have never seen the debt ceiling used in this fashion, where the notion was, you know what, we might default unless we get 100 percent of what we want. That hasn’t happened.

Actually, we’ve seen this repeatedly in the recent past.  Under Presidents Ronald Reagan and Bill Clinton, for instance, spending cuts (or what passed for them—reductions in the rate of growth of spending) were explicit parts of the deal to raise the ceiling.

Obama then added this:

Now, as I indicated before, I’m happy to have a conversation about how we reduce our deficits further….

There are a couple of things about this one.  One is that bit about being “happy to have a conversation.”  A conversation is an “exchange of thoughts and feelings.”  It’s not a negotiation.  Obama is willing only to engage in idle chit-chat on this subject; he’s not willing to enter into serious negotiation.

The other thing is that nonsense, “reduce our deficits further.”  As a man of Obama’s learned education knows—as his economic advisors in the White House and in his Cabinet know—a reduced deficit is still a deficit, and so it still grows our nation’s debt.  Once again, Obama is unwilling to take our debt seriously.

Obama then concluded his evasion of the original question (he never did address Garrett’s question of how Obama reconciles his Senatorial “No” with his Presidential “Raise it now” demand on the debt ceiling) with this:

But what you’ve never seen is the notion that has been presented so far at least by the Republicans that deficit reduction will only count spending cuts, that we will raise the deficit—or the debt ceiling dollar for dollar on spending cuts.  …what we’re not going to do is put ourselves in a position where in order to pay for spending that we’ve already incurred, that our two options are; we’re either going to profoundly hurt the economy, and hurt middle-class families, and hurt seniors, and hurt kids who are trying to go to college, or alternatively we’re going to blow up the economy.

The first part of that is true.  Having seen the failure of tying reduced spending growth rates to raising the debt limit, the House Republicans now are tying actual spending cuts to raising the debt ceiling.

The rest, though, is exactly what Obama is threatening.  He’s holding out for “100% of what [he] want[s],”  or he’ll blow up our economy.  He’s the one demanding a debt ceiling raise with no strings attached (he’s even called for ceding borrowing authority to him) and refusing to discuss any alternative.  He’s the one who’s said he won’t negotiate at all on the debt ceiling.

Yet, it’s his demand for continued borrowing, for continued expansion of our debt, that is profoundly hurting the economy, the middle class, seniors, the poor (who are notably absent in his “concern” for the welfare of others).   The opposition has already agreed to raise the borrowing limit.  They just want real spending cuts, also, so as to break the DC addiction to spending, and so as to reduce—or even eliminate—the need to borrow more.

Tax Failures

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The Foundry is offering a list of tax increases that went into effect with the start of the year, the fiscal cliff fiasco notwithstanding.  Here are some of them, and the Obama attack on jobs embodied in them is…interesting.

Payroll tax: increase in the Social Security portion of the payroll tax from 4.2% to 6.2% for workers.  This hits all Americans earning a paycheck—not just the “wealthy.”  For example, The Wall Street Journal calculated that the “typical U.S. family earning $50,000 a year” will lose “an annual income boost of $1,000.”

I have trouble with this.  Conservatives do themselves no good to tout this as a tax increase.  This is, in fact, merely the expiration of a payroll tax reduction that was purely temporary from the start, and advertised and passed as temporary.  Worse, this tax holiday was nothing but vote pandering while defunding an already failing Social Security System.

Tax rates on investment: increase in the rate on dividends and capital gains from 15 percent to 20 percent for taxable incomes over $450,000 ($400,000 for single filers).

Taxes on business investment: expiration of full expensing—the immediate deduction of capital purchases by businesses.

Another investment tax increase: 3.8 percent surtax on investment income for taxpayers with taxable income exceeding $250,000 ($200,000 for singles).

Medical device tax: 2.3 percent excise tax paid by medical device manufacturers and importers on all their sales.

These directly attack jobs and job creation.  With active disincentives on investments, these will, inevitably, fall.  With reduced investing, there is less capital available for business’ R&D, which represents new products in production, which represents new—and more—jobs in the producing.  With reduced investing, there is less capital available for business expansion, and such expansion translates directly into jobs.

Death tax: increase in the rate (on estates larger than $5 million) from 35 percent to 40 percent.

Another payroll tax hike: 0.9% increase in the Hospital Insurance portion of the payroll tax for incomes over $250,000 ($200,000 for single filers).

The increase in the death tax makes it harder for small business owners to pass on to their heirs their businesses.  This hits particularly hard businesses whose value is largely tied up in physical assets, like small manufacturers and small farmers.  These folks will be faced with an increasing likelihood of having to sell their businesses, or major components of them—things they’ve spent a lifetime building up—in order to pay the death vig.  These sales/downsizings represent existing jobs that will go away with the sale/downsize.

That last payroll tax increase also will hit the small business owner especially hard.  It just got more expensive to hire additional labor or to keep existing labor.  Moreover, there’s significant opportunity cost: that 0.9% tax represents money that now cannot be committed to R&D (already expensive for small businesses) in an effort to stay competitive; or committed to improved marketing in an effort to maintain/grow market share; or committed to payroll in the form of a new hire, pay raises, bonuses; or….

 

h/t The Spirit of Enterprise

An Obamacare Outcome

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Omaha, NE’s, WOWT television reports that an 11-restaurant Wendy’s franchise

has announced that all non-management positions will have their hours reduced to 28 a week.  Gary Burdette, Vice President of Operations for the local franchise, says the cuts are coming because the new Affordable Health Care Act requires employers to offer health insurance to employees working 32-38 hours a week.  Under the current law they are not considered full time and that as a small business owner, he can’t afford to stay in operation and pay for everyone’s health insurance.

The reduction will affect 100 Wendy’s franchise employees.  Here’s another example of Obamacare pricing those it claims to help out of the market.

Middle Class, Luck, and American Power

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George Friedman, writing for Stratfor (he’s also their Founder and CEO), has an article out concerning the American middle class and American global power.  The whole article is well worth reading, but for now, the relevant remark comes near the end:

It would seem to me that unless the United States gets lucky again, its global dominance is in jeopardy.  Considering its history, the United States can expect to get lucky again….

The luck to which Friedman refers concerns some fortuitous unintended consequences, and he offers three examples:

The GI Bill was designed to limit unemployment among returning serviceman; it inadvertently created a professional class of college graduates. The VA loan was designed to stimulate the construction industry; it created the basis for suburban home ownership. The Interstate Highway System was meant to move troops rapidly in the event of war; it created a new pattern of land use that was suburbia.

The threat to our status as a global power—and by extension to our freedom of action as a nation—stems from a generation of the failure of a long-standing belief in American culture—the faith in the availability of economic upward mobility.  For instance, median household income in 2011 was $49,000, just below the level in 1989 in real terms; it seems that upward mobility has stagnated.

Luck matters, but to a very large extent, we make our own luck.

Underlying this making is individual responsibility, individual initiative, and individual risk-taking.  In all of our past booms, including those in which fortune played a role through those unintended consequences, the freedom to exercise those individual characteristics was both broadly present and not very much circumscribed by government intervention.

Here’s a present example of the role played by fortune, this time negatively: those individual characteristics, and parallel ones in business, are severely circumscribed by government regulation in all aspects of our lives.  We’re restricted in what we’re permitted or required to buy or to throw away (see Obamacare and CFL bulbs), in the decisions businesses are permitted to make in their own interests rather than government’s (see Obamacare and Dodd-Frank with its CFPB abomination), in what businesses are permitted to release as by-products of production or sales.

Our ability to make our own luck, today, is severely limited by government.  Fortuitous unintended consequences are a lot less likely in an environment of rapidly increasing government control over the economic environment which underlies the making of that luck.

There’s another factor at play, too: those government restrictions also have the unintended consequence of restricting upward mobility.  The poor become trapped in their stratum and cannot move up into the middle class due to those restrictions’ effect on job creation and hiring.  This not only works to the detriment of those poor, it shrivels the remaining middle class.

National Default on the National Debt

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President Barack Obama and his Senators keep saying that House RepublicansCongress must raise the debt ceiling or the US will go into default.  The latest example of this claim came when Obama, through his White House Press Secretary, Jay Carney, said in response to the idea that the administration could simply mint a $1 trillion coin and then spend that,

There are only two options to deal with the debt limit: Congress can pay its bills or it can fail to act and put the nation into default[.]

Here’s what the Constitution says on the matter (you might recall that bit of paper—a document that Progressives insist ought to be scrapped or that already is useless and non-binding; maybe its inconvenient limits on government are why).  From Article I, Section 8, in relevant part:

The Congress shall have Power…to pay the Debts…;

To borrow Money on the credit of the United States;

Thus only the Congress can borrow—or create the conditions for paying what it has borrowed.  The President, as with all laws (nearly all of which, by the way, have his signature on them—he’s actively agreed with them, except in those very rare cases where his veto has been overridden), has only to execute them—here, to spend the money authorized, to collect the taxes authorized, to borrow according to the Congress’ budget and borrowing limit.  He’s Constitutionally, and by his oath of office, required to faithfully execute those laws.

(Incidentally, a later clause in that Section 8 says this:

To coin Money, regulate the Value thereof….

Thus, only Congress can mint a $1 trillion coin, not Treasury.)

The 14th Amendment, which some Progressives like to cite as a means for Obama to bypass Congress on the national debt, says in relevant part:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

Notice that confusing part—it being more than 100 years old—”authorized by law.”  The clause not only says that the US’ debt must be paid—no getting around that—but the only debt that must be paid is that authorized by law—that budget thing (from an even older and apparently even more confusing part of the Constitution), which must be passed by Congress and signed by the President or his veto overridden.  The president cannot (not may not—cannot) create debt on his own recognizance.

On the first part above, then, Obama has it right—Congress can agree to continue spending and borrowing, or it can decide not to act (or anywhere between the two extremes: cut spending enough to fit it into current revenues, thereby eliminating the deficit and stopping the growth in borrowing altogether, or cut spending to fit within projected revenues and raise the debt ceiling somewhat, with a view to gradually reducing spending, eliminating the deficit over time, and ultimately stopping the growth in borrowing altogether, for example).

What are the practicalities of the matter?  Say the debt ceiling is not raised; what results?

The interest on our current national debt (some $16+ trillion at the end of 2012, an explosion of 60% in Obama’s first four years) ran to $220 billion.  Total revenue collected from various tax sources (including payroll taxes for Social Security, et al.,) by the Federal government was $2.5 trillion—a shade over 10x those interest payments.

In short, there is no risk of default from Congressional inaction.  There is plenty of money with which to pay the interest, thereby keeping our debt current and not in default.  There’s plenty of money with which to roll existing debt that’s coming due—essentially to refinance by paying off that old debt with new borrowing—within the current debt ceiling.  This is the same as us refinancing our homes, which we must do within our own debt ceilings, values our lenders determine based on our credit rating.  There’s even plenty of money with which to begin in aggregate paying down that debt, reducing it below those $16 trillion, and to reduce it further in subsequent years.

Thus, if Congress declines to raise the debt ceiling at all, there would be spending cuts, but no default.  Federal spending in 2012 ran to $3.7 trillion, rather more than those $2.5 trillion in collections.  Progressive (and Conservative) favored programs would be drastically curtailed.  Welfare programs like food stamps, subsidies for “green” energy companies, farm price supports, and the like would be severely curtailed.  Entitlement programs like Social Security, Medicare, and Medicaid transfers to the States would be greatly circumscribed.  Withal, no default, and not even very many existing programs eliminated.

However, if Obama and his Senators truly are concerned about “not paying for our spending on the backs of our seniors and the middle class” (and the poor—that group these Progressives have been ignoring right along), they’ll get serious about spending cuts, the deficit, and the debt.  The cuts then could occur in a deliberate, controlled manner, across programs about which Conservatives and Progressives compromise on curtailing.

Obama and his Senators know what the Constitutionally mandated priorities are.  They simply are lying when they make their claim of debt default, and the NLMSM are complicit in the claim’s spread.  What these Progressives really mean is that, absent a debt ceiling increase, they will default on their vote buying promises.  And that terrifies them, since among those to whom they “owe” their vig are unions.