Category Archives: political economy

Do-Nothing…Congress?

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That’s the mantra of President Obama, Progressives generally, and the NLMSM.  But what’s actually going on?

In the Senate, we’ve had no budget offering, despite a legal requirement for one, for 900 days.  Indeed, the Senate has actively refused to propose a budget for those two and a half years.  We see legislation offering tax cuts blocked unless those cuts can be “paid for” with tax increases elsewhere.  We see active suppression of legislation encouraging pipeline infrastructure development which would produce tens of thousands of jobs promptly.  We see legislation sent directly to the floor of the Senate, bypassing committee opportunities for debate, with debate on the floor further blocked, thus rendering the legislation’s movement to a vote impossible.

In the House, we have a budget passed that actively cuts spending and offers reform for Social Security and Medicare so those programs can survive.  We have 17 separate jobs-related bills passed.  We have 5 bills related to American energy independence passed.  We see active support for fiscal moves that contribute both to reducing the nation’s debt and eliminating the annual budget deficit (a necessary prerequisite to lowering the debt).  We have a procedure that requires committee debate followed by floor debate.

The budget, the jobs bills, and the energy bills sit idle in the Senate, as the world’s greatest deliberative body refuses to consider them in any way.

Do-nothing Congress, indeed, but is it Congress as a whole, or one house of Congress that is bent on doing nothing?

Hmm….

Debt and Taxes

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The price of our burgeoning national debt is this.  As our debt grows, more of our national income must be taken out of our economy and spent: at minimum, on the interest payments due; if we’re to actually pay off the loans, even more on principle payments.  But as we make the payments, if we borrow still more, still more money must be taken out of our economy for the additional payments.

In essence (to beat this horse a bit), money taken out of our economy to pay our increasing debt is money not available to our economy for use in productive things: capital investment, R&D, consumption, hiring, and so on.  Our nation’s debt, in the best of times, is a drag on our economy, but when it gets out of hand, it’s worse—it generates a negative feedback loop that actually contributes to shrinking our economy.  The more money taken out to make the payments, the less money for growth; the less growth, the less capacity for absorbing the removal of money, and the more that same removal amount hurts.

It’s true enough that the Federal Reserve Bank can manipulate interest rates, so as to keep those interest payments small and less of a drag, but only to a point.  In the end, Mr. Market overrules all of us, including our government.  As our debt grows (Greece, Italy, and Spain are graciously serving as object lessons here), our ability to repay it becomes more doubtful.  It’s certainly true that the Fed also can print all the dollars it wishes to print with which make those payments.

But there’s a rub here, too.  Our dollars are only worth what they can buy, and as we print more and more of them, they can buy less and less (that’s inflation)—including the “purchases” represented by debt payments.  There will come a time, sooner rather than later, when the interest the Fed is setting on our debt no longer accurately reflects the risks inherent in our debt, both in terms of our ability finally to repay and in terms of the value received from lending to us.  Worse, it will have become impossible to determine an accurate price either of our debt or of the risk in lending to us.  At that point, who will wish to lend to us?  Ask the Greeks, Italians, and Spanish how this is working out for them.

The price of rising taxes, another leg to our government’s efforts to right our economy, is this.  Taxing, at bottom, withdraws money from our economy.  Take everything written above about debt payments subtracting from our economy’s capacity and substitute “tax collections,” and we have the same negative feedback loop.  Increasing those taxes—a need seemingly justified by our stagnating, if not fading, economy—simply exacerbates the problem, with even more money taken out, an even more constricted economy as a result, and even less revenue going to government.  And more importantly, an even less effective economy, with lower production, less investment, fewer jobs, and reduced quality of life.

There is this one additional factor.  Some of the tax revenues do find their way back into our economy, but not all.  Roughly 75-80 cents of every dollar collected in taxes is all that makes it back.  Leaving aside the fraud, waste, and abuse that is a favorite target of our politicians’ perennial “spending cut” moves, the government acts as a middle man in the transactions, and so it keeps a fraction of every tax dollar for itself for the purpose.  Additional fractions of the tax dollar are lost simply to friction.

Further, government spending is money that is significantly misallocated, if only because it’s allocated to purposes we would not have chosen had the money been left in our hands.  It’s also misallocated, though, because so much government spending is allocated to things that inherently wasteful and destructive—overregulation from EPA regulations threaten electricity-generating power plants with closure, at the costs of jobs and of increased instability of our national power grid, for instance—and misguided—subsidies for “green” energy enterprises and for oil and gas production, for instance.  These misallocations reduce the efficiency of our markets so that our economy cannot even use the reduced production effectively.

Will HARP 2.0 Accomplish Anything?

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The administration has come out with an updated Home Affordable Refinance Program, what The Wall Street Journal‘s  Smart Money calls HARP 2.0.  With this improvement, underwater homeowners can refinance their mortgages at a lower rate if they have Freddie Mac- or Fannie Mae-backed mortgages, they’re current on their existing mortgages, and they’ve not missed a mortgage payment in the last six months and not more than one payment in the last twelve.

There are a number of items to consider, though.  Why would anyone want to take the lender’s side of such a (refinanced) loan?  The collateral offered has less value than the collateral that was offered for the original loan: it’s the same house, now devalued, often very significantly.  This means that a lender that retains the loan in its portfolio is giving up one income stream for a smaller income stream on a lower-valued home. This decrement often can be worth it, given the reduced loan to collateral value ratio associated with an increase in home value, but in this market…?  Additionally, the lender that sells the loan to a packager or another loan servicer is going to get a smaller sales price for the refinanced loan, since both the collateral and the income stream are smaller.

On the other side of such loans, the borrowers still will be underwater.  To be sure, this isn’t a problem for lenders whose borrowers in good standing or for borrowers who aren’t trying to sell, but is a problem for borrowers looking to relocate—to a different job in a different city, or to a job at all in a different city.  But these borrowers aren’t trying to refinance.

There are mechanical problems with HARP 2.0, also.  Even though the Luddites who underwrite loans manually can begin using the program now, the government’s IT whiz kids won’t have the software in place to support the new rules until early February for Freddie Mac-backed mortgages or March for Fannie Mae-backed mortgages.  This shouldn’t be surprising, though: this performance is of a kind with the government’s IT performance with the IRS’ “upgrade” of their computer systems and of OPM’s government jobs Web site.  Still, I remain amazed that, given as long as the government has known about this HARP variation, the software requirements weren’t able to be satisfied already, much less won’t be for another three+ months.

But beyond the bureaucrats’ lack of thought about how much this this program actually is going to accomplish, the lack of consideration for consequences or for history is…apparent.  Consider what the government holds out as selling points for this update:

  • borrowers who apply to the same lender to whom they make their monthly payments won’t have their credit scores checked, and
  • borrowers won’t be required to provide documentation proving their income.

This just repeats the mistakes that contributed to the housing bubble and burst in the first place:

Hmm….

Government Controls: A European Example

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I’ve been posting about the European debacle for some time; here’s another.  I stay on this subject because there are lessons here for us, lessons that are especially urgent given that our political class sees Europe as a valuable model for governance.

Here are the current moves, just completed or in progress.  Six central banks have gotten together to make acquisition of dollars for Europe, paid for with euros, a whole lot easier.  This move just buys some time, maybe, but it doesn’t address the underlying problem of too much government spending and too much unserviceable sovereign debt.  And it ignores the risks to us should sovereign default in the euro zone become widespread.

The move in progress is an attempt to more tightly integrate the euro zone nations’ budgets—to put them more under the control of the EU central “government” in Brussels, and less under the control of the sovereign nations responsible for them.  Indeed, as proposed by French President Nicolas Sarkozy, this is a three-part move: morphing the Treaty of Maastricht (which created the EU and the euro) into a new treaty incorporating greatly increased budget discipline imposed from Brussels; creating a European Monetary Fund, nominally to support “countries in difficulty;” and euro zone moves made by majority vote rather than requiring unanimity.

The arguments made for tighter integration, singling out Sarkozy (he’s by no means the only one making these arguments; he’s just the loudest and most articulate) include the following.  “All economies became totally under the mechanism of finance, the speculative logic. We’ve seen how it’s affected industry. Also how it’s degraded the value of work.”  And “There can be no common currency without economic convergence without which the euro will be too strong for some, too weak for others, and the euro zone will break up.”

Taking the three steps to tighter integration in turn, here are some problems.  The various sovereign governments [sic] have, with their central planning to their varying degrees, already been over-managing their national economies, and the result is too much spending and too much borrowing, and so we have the present economic strait.  It’s illogical to expect that even more centralized control will improve on the track record—correcting the failure of central control by increasing the degree of central control makes no sense.

Second, a European Monetary Fund “support” facility will only be used to bail out those nations that find themselves in economic trouble.  Nations will have no incentive to apply discipline, or to do more than pay lip service to budgetary diktats from Brussels.  Knowing—or merely believing—that a bailout will be in the offing completely undoes any hope of greater national responsibility.  Feeding this is the fact that now the nations involved can blame their troubles on Brussels’ requirements and so demand that Brussels fix them.  Through the EMF.

Third, the majority vote capacity just means that the profligate many can demand that the responsible—and so sound—few make up the shortfalls of the many’s failures.  This means that Germany will reduced to the euro zone’s piggy bank.  Some argue, though, that this is only just.  It’s what reparations are for.

But at bottom, the argument for tighter integration—no matter the mechanism—ignores some fundamental problems that must be solved before the euro zone’s sovereign debt problems (note that: the problems are those of the individual sovereign nations, not of the euro zone as a whole) can be solved.  For instance, to take a narrow case for illustration, “the mechanism of finance” is not what has cheapened labor.  Things like 35-hour work weeks; labor laws that functionally guarantee a job for life, regardless of the performance of the employee; and retirement in middle age have done that.

But more importantly, tighter integration is doomed to fail when the polities involved don’t agree on the relationship between citizen and government, the role of government, or the purpose of money.  It is this too-great heterogeneity of social philosophy that drives the single euro to be too strong for some and too weak for others.

The parallels with our own situation are apparent.  We have an increasingly intrusive central government that seeks to increase its control over our own economy in order to correct the failures of its prior controls.  We have an increasingly profligate central government that spends too much by ever-increasing margins, and so that borrows ever increasing amounts.  We have a central government that insists on bailing out every one and every thing, thereby attempting to ban failure from our own market place.  And the Fed has been turned into the national piggy bank.

The answer for us, as it is for the EU, is less central control and greatly shrunk governments and reduced government roles.  And greater respect for the intelligence and the wisdom of the sovereign citizens, and so greater trust in us to take care of ourselves and of our neighbors without government diktats, without government taking our property to redistribute to others, without government “protecting” us from ourselves and the consequences of our actions—which “protection” also protects us from the consequences of our successes.

It’s the Wrong Fight

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Republicans say that any tax cuts must be paid for with spending cuts elsewhere, and this is certainly true.  But what they’re talking about in the present case is payroll tax cuts.  Certainly, these cuts also must be paid for with spending cuts from somewhere else, but the logic ends there.

Senator Dick Durbin (D, IL) even calls out the Republicans on the matter, as I’ve written elsewhere.  But why are the Republicans letting themselves be drawn into this at all?  They’re ceding the terms of the debate and the entire debate to the Progressives.

On what basis do the Republicans—or anyone—agree that funding for Social Security should be cut?  This is a program that is already widely acknowledged to be desperately in need of reform or it’s destined for failure, yet the Progressives refuse to allow any reform.  Cutting funding by cutting payroll taxes that are intended for the Social Security Trust Fund only hastens that collapse.  Instead, we get Senator Jon Kyl’s (R, AZ) lame answer that “The payroll tax doesn’t go into general revenue. It supports Social Security.”  While true, it misses the whole point.  What is the Republican’s plan for reforming Social Security (and Medicare)?  Congressman Paul Ryan (R, WI) put forward ideas for both programs in the budget the House passed in 2010 that are worth serious discussion.  Yet Republicans have barely mentioned those ideas since: were they not serious about these reforms?

More to the point, why didn’t Kyl turn the argument back on Durbin and ask him why he’s opposed to really leaving money in the hands of Americans and our businesses by supporting income tax cuts for everyone?

Senator Durbin has agreed that tax cuts are good for Americans (he said so with the payroll tax cuts); Republicans should be arguing for income tax cuts, and permanent ones, not just via the annual argument over extending the Bush tax cuts, or some subset of them.  Republicans should be challenging the Progressives to offer legislation that provides for permanent income tax cuts for individuals and for businesses; they have a willing ally in Senator Durbin.  Or he’ll be shown by the debate to be disingenuous.  Republican candidates for President have offered real, broad tax reform; Republicans should be discussing these ideas more—in town hall meetings, on the floor of the House and Senate, on the radio and TV talk shows, at every chance they get—and they should make chances to talk about them.  Since they don’t do any of that, I have to ask: of what are they afraid?

The US already has the most progressive individual income tax structure in the developed world.  The President is openly engaging in class warfare as he campaigns for reelection and for his More Taxes More Spending ideology.  The Progressives in the Senate have not allowed the Senate to satisfy its statutory duty to propose an actual budget—of any sort—for nearly three years.  The Progressives nearly blew up the debt ceiling negotiations over their refusal to cut spending and their demand to raise taxes.  The Progressives did succeed in blowing up the Super Committee with their nonnegotiable demand to raise taxes by $1 trillion dollars.  The Republicans need to be calling out the Progressives on all of this.

Instead, Republicans let the Democrats control the argument and limit it to a narrow, doomed to fail path.

On top of this, the only jobs program that gets debated is the Progressives’ tax and spend Jobs Bill, while the Republicans don’t even have a coherent jobs message of their own, much less an actual plan.  Oh, yeah, there’s that Ryan bill from nearly two years ago.  About which they’re absolutely silent.

By letting the Progressives have the debates on their terms—again—and by having no coherent message of their own, the Republicans are in danger of giving control of the House right back to the Progressives in 2012 and of leaving control of the Senate and of the White House in their hands, too.  We’ve seen how well that’s worked for our country.  Four more years will only extend the damage to national disaster proportions.