A Fine Debt Deal

The bipartisan deal, announced yesterday by the White House, to raise the debt ceiling alongside significant spending cuts has not only helped avert an economic crisis, but has started a much needed process towards fixing America's fiscal situation.  As Speaker of the House, John Boehner (R-OH) said, "[It is not] the greatest deal in the world.... But it shows how much we've changed the terms of the debate in this town....”

The deal, which has yet to be voted on by either chamber of congress but is largely expected to pass, includes immediate cuts and an increase in the debt ceiling.  This is to be followed by a second round of cuts and debt ceiling raises, backed by the recommendation of a bipartisan committee.  Notably absent at this stage are any tax increases or a balanced budget amendment.  Both issues will be raised by the time of the second round of cuts.

Republicans should be quite happy with the outcome.  While the deal certainly has not achieved everything that the GOP desired, it is a good first step.  Reforming the fiscal condition of this country is a process.  After some 80 years of fiscal misguidance, it is far too ambitious to expect all of the needed changes to be implemented during one summer's battle over the debt ceiling.  What this battle has done is begin to change the national mentality.  It has rewritten the terms of debate in a manner that is more conducive to further reforming the fiscally unsound policies of the post-war era.  For the first time, debt limit increases have been linked to to spending cuts.  As Senate Majority Leader Harry Reid (D-NV) bemoaned, the debt ceiling has been unconditionally raised 74 times since 1962.  This has now changed and each future debt limit increase will most certainly involve debates over additional cuts.

In one sense, it is probably good that the Republicans have not received everything that they want - and everything the economy needs - in this one deal.  If the GOP had managed to drive through a "dance-in-the-streets" deal - one complete with a balanced budget amendment, fulsome plan to reduce our national debt, and severe cuts to government spending and entitlements - the debate would be prematurely terminated.  This may have thus provided the needed fiscal changes, but would accordingly fail to make them lasting.  It would only be a matter of time before the left regained the position to scale back these reforms.

The fact is while these needed changes are apparent to many, especially on the right, they are unfortunately not obvious to all Americans.  Fixing policies is only half the game, changing the American mentality is the real crux of the battle.  Unfortunately, many Americans are not quite ready to completely revamp their thinking about deficit spending and the government's fiscal responsibilities.  Accordingly, winning too much, too soon could undermine the broader discussion that is needed.  America needs to realize the necessity of making these reforms and turn from its all-the-time-Keynesianism deficit spending mentality to one of long-term fiscal responsibility.  The process that the battle over the debt ceiling has started will provide the continued platform to present these arguments.  These reforms will only become permanent if the American ethos is severely altered. Spending beyond our means is unsustainable, but unfortunately much of America will need to be convinced of this through a drawn out debate.

Republicans should be sanguine with their success.  No, it is not perfect, but it is an amazing start.  For a party that only controls one-third of the government and has faced a Democratic opposition that started on the far-left of American politics, it has been an astounding feat to so change the national dialogue.  There is still much more work to done, and given the ingrained and long-established interests it will not be easy; yet a historical process has begun.  For this we should be proud.

Not Such a Hard Deadline

According to a New York Times report, August 2nd is not really the "hard deadline" that the administration has been arguing will signify the end of the federal government's ability to pay its bills.  For months pressure has been building to raise the debt limit by this date to avoid the catastrophic event of default.  However, as the Times reports it seems that there is at least another week of cash available to pay the government's bills.

It turns out the federal government is sitting on some extra cash.  

Thanks to an inflow of tax payments and maneuvering by the Treasury Department, the government can probably continue to pay all of its bills for several days after Aug. 2, providing potentially critical breathing room for Congress to raise the debt ceiling, according to estimates by several Wall Street banks and a Washington research organization.  

The consensus is that the government will not run short of money until Aug. 10, when it would be unable to cut millions of Social Security checks without borrowing more money. ...The government will exhaust its ability to borrow more money on Aug. 2, which is equivalent to maxing out a credit card. But there still will be cash in the federal wallet.  Some Republicans have expressed skepticism about the Aug. 2 deadline, describing it as an artificial line drawn by the Obama administration for political reasons. Analysts emphasize, however, that the deadline is real; it’s just the date that is inexact.

Obviously this does not obviate the need for some deal to, at least in the short-run, raise the debt ceiling with concomitant cuts in spending and some tax reform.  It does however provide the markets with some much needed time before "crisis" hits.  If these numbers are legitimate, it would be prudent for the White House and congressional leaders to seize upon them to quiet market psychology.  Winning a political battle is not worth sinking the economy.

Redefining Poverty

There is a problem of definitions in American politics.  Although not a new phenomenon, it is unfortunately one that is rarely discussed.  In many instances, challenging the accepted political definition of certain words leads to harsh, acerbic, and often unwarranted attacks by those who wish to defend a political definition for their own partisan uses.

In a recent report, the Heritage Foundation has courageously taken a stand against the definition of one of these words - "Poverty".  The abstract to the full report states the following:

For decades, the U.S. Census Bureau has reported that over 30 million Americans were living in “poverty,” but the bureau’s definition of poverty differs widely from that held by most Americans. In fact, other government surveys show that most of the persons whom the government defines as “in poverty” are not poor in any ordinary sense of the term. The overwhelming majority of the poor have air conditioning, cable TV, and a host of other modern amenities. They are well housed, have an adequate and reasonably steady supply of food, and have met their other basic needs, including medical care. Some poor Americans do experience significant hardships, including temporary food shortages or inadequate housing, but these individuals are a minority within the overall poverty population. Poverty remains an issue of serious social concern, but accurate information about that problem is essential in crafting wise public policy. Exaggeration and misinformation about poverty obscure the nature, extent, and causes of real material deprivation, thereby hampering the development of well-targeted, effective programs to reduce the problem.

The report continues by discussing the standard of living experienced by most "poor" Americans and how high these are, both in historical comparisons and vis-à-vis other countries.  It makes the key argument that there is a need to separate the truly destitute (eg. those that chronically lack shelter, food, or clothing) from those that are just defined as poor.  Due to limited resources, this expansive definition of poverty has not only injured the truly destitute but provided for those that are arguably not needy.

The U.S. Census Bureau, which determines the poverty thresholds, bases their calculation of these thresholds on a 1963 study that looked at the Department of Agriculture's low cost food plan.  Surprisingly, it was not designed to reflect the daily needs of an individual or family.  "...[They] did not develop the poverty thresholds as a standard budget... a list of goods and services that a family of a specified size and composition would need to live at a designated level of well being." 

While the Census Bureau's "poverty thresholds" are only used for statistical purposes, the Department of Health and Human Services (HHS) further complicates issues by setting forth "poverty guidelines" for administrative purposes.  While these are generally based on the Census Bureau's numbers they are modified for various programs (for instance scaled up by some percentage).  These guidelines are what are used in most welfare programs.

Arguably both the Census Bureau's and HHS's definitions are exceedingly arbitrary.  As the Heritage report empirically supports, far too many are able to achieve substantial luxuries while nevertheless being deemed poor by the government.

A secondary source of definitional challenge comes from politicians who often use the term "poverty" in a relative sense.  A relative definition of poverty signifies that poverty is determined by some distance from a measure of "middle-class" - for instance the median income. This necessarily implies that the problem of poverty can never be solved, unless all incomes become very narrowly distributed around a median income.  Taken to its logical conclusion, in some perverse world, poverty could easily be eradicated by evaporating the wealth of the richest in a country without any concomitant change in the position of the poorest. By thus diminishing the "wealth gap," relative poverty would no longer exist. Obviously such a precept is laughable - no state would be better off by removing wealth from society - but it nevertheless is the natural conclusion of a doctrine of relative poverty.  In reality, "relative poverty" is nothing but a euphemism for "income inequality."

Instead, poverty should be measured in relation to what a person needs to achieve certain necessities, such as food, shelter, and clothing. By using an such an absolute measure, poverty is defined by essential characteristics not an arbitrary statistical formulation or relative comparison. This is undoubtedly a more just definition of poverty and puts the state in a better position to provide resources to alleviate poverty. It also provides proponents of the welfare state with a better position from which to defend the need for state assistance in eradicating poverty.

[By claiming the American definition of poverty is wrong, one does not mean there are not people who truly are in need, nor that there are not those who are truly poor in America.  But it does imply that a changed definition can have significant implications for welfare policies.]

It is to be expected that vested interests will attempt to avoid any discussion, let alone any changes to the definition of poverty.  Expansive definitions of poverty allow numerous constituents (particularly but not exclusively of the Democrats) to gain benefits at the expense of others.  It is unlikely that recipients of handouts (whether low- or high-income) will be willingly to abdicate their lucrative positions.  This is unfortunate and unfair.  In such times of economic difficulty and budgetary disorder it is necessary to carefully study if our current definitions and resulting policies have stepped beyond what is appropriate and into the realm of social and economic largess.

Arguably, much of our welfare state has become a system of wealth redistribution rather than a social safety net.  This is not so much a critique of the concept of the welfare state but of its abuse to fulfill abstract notions of social justice.  As Heritage points out, our working definition of poverty has become one much more about "income 'inequality'" than one of need.  This has arguably caused the state to venture far outside of its appropriate bounds and has indubitably contributed to our expanding fiscal woes.  According to the authors of the study, "President Obama plans to make this situation worse by creating a new 'poverty' measure that deliberately severs all connection between 'poverty' and actual deprivation... giving the President public relations ammunition for his 'spread-the-wealth' agenda."  A redefinition of "poverty" to more accurately reflect individuals' needs may not only help alleviate America's budgetary problems but allow a misappropriation of the system to revert to its moral underpinnings.

The Escape Clause

In light of today’s meeting between congressional leaders and the White House over the debt ceiling and entitlement cuts, two Republican senators have voiced strong support for a balanced budget amendment. Writing in the Wall Street Journal, Senators Olympia Snowe (R-ME) and Jim DeMint (R-SC) state that:

A constitutional amendment to balance the budget is imperative if we are to provide continuity of fiscal responsibility, and ensure we never return to the recklessness of the past and present. It's time Congress passed the amendment and gave the states—and "We the People"—their say.

The senators’ argument not only has wide support amongst the base and Republican politicians; all 47 GOP senators have endorsed such an amendment; but is sound and well articulated. The irresponsibility of continuous spending beyond our means is ruinous for the economic future of the United States. As Snowe and DeMint argue, “the only way to compel lawmakers to maintain their [fiscal] responsibility forever is a balanced budget amendment to the Constitution.”

However while the merits of such an amendment are clear to nearly all on the right and the more sensible on the left, there is at least one potential drawback that needs to be considered in the language of any acceptable proposal. While in nearly all instances there really is no reason to maintain an imbalanced budget, there are a few possible exceptions to the rule. Any balanced budget amendment must include an escape clause in order to prevent hamstringing future leaders (or daresay lead to a repeal of this amendment).

The most obvious exception is the case of major war or national catastrophe. It would be extremely difficult for any country to wage a large scale war, like WWI or WWII, without resorting to debt. Not only would such a restriction be impractical, but it would arguably be immoral to prevent our leaders from taking necessary measures to protect the country.

Concomitantly, there is an argument to be made that the costs of such a war (WWIII) should be spread over multiple years, if not multiple generations. After all, the sacrifices of those who fought in WWII were not just for the benefit of their generation but their progeny as well. It may be impossible for future generations to shoulder past sacrifices in terms of lives; however, it is possible to spread the financial costs. Utilization of debt is a prime tool to balance the costs of such conflicts over multiple years and generations.

Obviously, such instances are exceptionally rare and thus the use of an “escape clause” would only be warranted under extreme circumstances. Nevertheless, the point remains that debt or even a deficit is not always a bad thing. In certain other instances such as significant national projects (how to define the worthy ones is a tough issue) and severe economic decline, deficit spending might have beneficial uses. Just like the responsible use of debt by the individual – a homeowner who takes on a mortgage or a student who takes out loans to pay for college – there are instances where government debt is acceptable, even beneficial.

Debt isn’t intrinsically bad. The excessive abuse of it is the problem. Funding programs (and entitlements) that the government should not even be involved in is bad. The current mentality of spending more than we produce on a yearly basis even goes beyond the Keynesian economics it purports to be based on (Keynes argued for deficit spending during economic downturns with surpluses in upturns, not deficit spending every year). Such a mentality needs to be eradicated and the balanced budget amendment is a fabulous way to do so. Politicians should just be careful that in their haste to solve a serious problem they don’t create a new one by failing to consider the potential benefits of debt. It is a shame to throw the baby out with the bathwater.

Public Unions vs. Private Unions

In the ongoing struggle between public-sector unions and debt-laden states, the left has rallied around the unions and their so-called collective bargaining rights.  The states, which have been forced to target excessive benefits in order to shore-up their fiscal situation, have too often been painted the bad guys for stripping workers of their "rights".  But as many recognize, the likes of Governor Chris Christie in New Jersey and Scott Walker in Wisconsin should be commended for their tough stances.

In an editorial in the Star-Ledger, Tom Moran draws a clean distinction between public- and private-sector unions.  He writes:

To the unions, and to their allies in the Democratic Party, collective bargaining rights are sacred — and pinching them like this is unforgivable.

...
So let’s look at collective bargaining, starting with the good stuff. Bargaining is what gave us an eight-hour workday, weekends off, basic workplace safety and wages that helped build the middle class in America. We owe all that to the unions, and they did it at the bargaining table.
 
But those gains were made by private sector unions. And the public sector is different in key ways.

For one, public worker unions have political power and can hand pick the people on the other side of the bargaining table. With money and volunteers, they can dominate local politics, especially in low-turnout elections.
...
Another big difference: Governments don’t go bankrupt, or move to Mexico. When auto workers negotiate with GM, they know that if they get greedy, they could lose it all. The cops in Edison[, NJ] have no such fears. So why not press for that deal that gives you and your family free health care for life?


Here’s one final difference: In the public sector, the people who pay the bills are the common folk, not the fat cats. The class-warfare language of the private labor movement doesn’t fit here.

Ask yourself this: Is it progressive to ask a senior on a fixed income to pay higher property taxes so that a cop or teacher can avoid paying a reasonable share of their health costs?

While Moran is somewhat more generous to private-sector unions than ANR generally feels comfortable with, his arguments regarding public-sector unions are dead-on.  The logic seems impossible - for both those on the right and the left - to avoid.  Hopefully, Americans will understand this before our budgetary mess permanently destroys our futures.

A Wisconsin Win

Wisconsin Democrats' refusal to return from their sojourn in Illinois has proven to be a failed strategy against Republican attempts to put severe limits on the practice of collective bargaining for public sector unions.  Earlier this evening, Republicans removed the provision from the budget bill, which required the presence of at least some Democrats to be voted on, and passed it in a separate piece of legislation.  While not yet signed into law, this dealt a severe blow to union monopoly and the state Democrats' stalling tactic.  Wisconsin Democrat's seem to have little remaining reason to remain "abroad" and now hopefully can get back to their work running the state of Wisconsin.

As argued last month, the power of unions needs to be curbed on both fiscal and moral reasons.  While Democratic strategies seemed to willingly ignore both of these concerns and their responsibility to do their job (there is a certain irony in Democrats going on strike to protect union interests), it is laudable that Republicans had the courage to terminate the standoff and begin moving the state forward.  Hopefully, some of the rancor will die down as the naive protestors return home and realize that most will end up better off without grotesque union interference. 

[As a somewhat interesting aside, if one explores who benefits from unions, the numbers are unsurprisngly (or surprisngly if one tilts to the left) small.  With just a rough analysis, it is clear that everyone outside the union is either unaffected or hurt (eg. higher prices for goods, increased taxes (public sector unions), or lower profits (business)).  Within the union, it is arguable that the top 50% of workers (measured in merit or skill) are hurt by the fact that without the union (eg. by their superior skill in a competitive market) they would earn higher wages. (Of course, if you do not believe a comeptitive market exists this is not as convincing.  But then again, there are better ways to get the competitve market than through an anti-competitive union.)  This leaves the bottom 50% who's wages are artifically raised and thus potentially benefit from a union.  If you count union dues and other costs, the average worker who is only marginally helped by unions drops right out of the "benefit-from-unions" category.  While this analysis is obviously rough, it just points to the amazing fact that so many support unions while so few benefit - or are even outright harmed.  None of this is a battle over worker rights, but over the power of a special interest.  Its about time the Left realizes this.]

It is the Entitlements, Stupid!

Unsustainable public entitlements seem to be the most talked about secret in the nation.  There does not appear to be a pundit out there who has not addressed the necessity for cuts in or fixes of the entitlement system.  Europe has started facing down this monster while US states (who have to balance their budgets) have begun the reform process.  Yet, strangely the federal government has done little to address the nation's budgetary mess.

In today's Wall Street Journal, Charles Koch wrote a poignant editorial about the need to fix America's fiscal situation.  He called on the government to tackle the overwhelming burden of the nation's entitlement system.

In spite of looming bankruptcy, President Obama and many in Congress have tiptoed around the issue of overspending by suggesting relatively minor cuts in mostly discretionary items. There have been few serious proposals for necessary cuts in military and entitlement programs, even though these account for about three-fourths of all federal spending.

His criticism is not solely reserved for the Democrats.  The GOP is equally culpable in the mismanagement of the national finances.  Koch attacks the concept of crony capitalism, which is seemingly endemic on both sides of the aisle.  Democrats and Republicans alike operate under a system that has utterly failed to face reality.  Koch argues that,

Crony capitalism is much easier than competing in an open market. But it erodes our overall standard of living and stifles entrepreneurs by rewarding the politically favored rather than those who provide what consumers want.

The purpose of business is to efficiently convert resources into products and services that make people's lives better. Businesses that fail to do so should be allowed to go bankrupt rather than be bailed out.
...
Our elected officials would do well to remember that the most prosperous countries are those that allow consumers—not governments—to direct the use of resources. Allowing the government to pick winners and losers hurts almost everyone, especially our poorest citizens.

Politicians, on both sides of the aisle, should heed these warnings.  Koch makes a powerful - and true - argument.  If American politicians, for fear of electoral retribution, fail to force tough choices on America, everyone will pay the price.  The federal government needs a serious dose of reform.  It needs to be smaller, more efficient, and supportive of free competitive markets.  Time to get started before it is too late.

Cheeseheads!!!

Today on NBC’s Meet the Press, Governor Scott Walker (R-WI) spoke eloquently (see below) about the ongoing debate over collective bargaining that has halted legislation in Wisconsin and seized the nation’s interest over the past few weeks. Walker, who has resolutely stood firm in his showdown with the Democrats, has proposed legislation that would not only require public unions to bear greater responsibility for certain benefits, but would also end the “right” of collective bargaining for public unions.

In reality there are two major issues at work. The first and most immediate is the budget issue. This has predictably been relatively uncontroversial. As most acknowledge, states across the country are in dire budgetary straits. Accordingly, the Wisconsin public unions have agreed to shoulder the increased responsibility for their fringe benefits.

It is, however, the second issue – namely the proposed abolition of collective bargaining for benefits – that has driven the unions into a fury and their Democratic supporters into Illinois. Democrats have become absolutely apoplectic about the attacks on their supposed rights, effectively shutting down the Wisconsin legislature and moving their foot-soldiers into the capitol building in Madison.

The battle is unsurprising, despite its contemptibility. It is natural to expect unions to defend the unjust handouts and special privileges conferred upon them by the power of the state and to stalwartly fight to prevent their eradication. Nevertheless, it is quite laudable that Governor Walker has had the fortitude to stand-up to the tyranny of collective bargaining and unions.

The argument for such a strong criticism of unions is simple. Unions, like any institution that has coercive power, can – and do – cause severe harm to others that may cross their paths. The unions have been afforded a rare opportunity to wield the coercive power that should only be possessed by governments (and even then in limited fashions). No other institution is granted such sweeping powers of coercion over private individuals. For instance, the automatic and mandatory deduction of union dues from paychecks is simply the power of taxation in private hands.

Furthermore, unions have severe distorting powers. They drive wages up and cause unemployment. A union is essentially a private club, established with explicit government approval, where benefits are unjustly taken from those who are excluded and given to those lucky enough to call themselves members. As Friedrich Hayek argues, the real crushing power of unions is not so much the power they have over their members, but the power they possess over those outside of the union. Not only is this arbitrary and uneconomical, it is blatantly unjust. No organization, whether union or otherwise, should be granted such powers of coercion.

For those union supporters who argue in terms of workers’ protections, their aims are noble yet misguided. Union-busting is about destroying a special interest, not about hurting workers. As Governor Walker argues, Wisconsin workers are comprehensively protected by a multitude of legislation - and rightly so. There is no dispute that workers, like other groups, should have protection from mistreatment. However, unions, due to the inherent harm caused by their coercive power, are simply not the proper forum for maintaining worker protections.

The battle against collective bargaining is a small step in the right direction. Unions should not be afforded any special privileges under the law. They should be allowed to exist like any private organization – free to assist their members in a variety of fashions but stripped of any pseudo-legal power over others. Governor Walker should be applauded for his resilience and justness in attacking a bastion of cronyism and illiberalism.

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The Budget, Entitlements, and Government

In today's Washington Post, Robert Samuelson wrote a poignant editorial on the much needed buget cuts.  He argues that government benefits, once lavished upon the electorate, are largely (politically) unremovable, becoming in the eyes of the people "property rights."  Coupled with the desire to minimize taxes this creates an untenable budgetary mess.  Samuelson correctly argues that partisan interests - whether farm lobbies, the elderly, or others receiving undue government support - should recognize a moral need for change and put aside their self-interest for the national interest.  In other words, he calls for a rewriting of the social contract.

The thrust of the argument is on the areas of the welfare state (or benefit state to construct it more widely in order to include agricultural subsidies and the like) that need to be slashed; however, he does tepidly venture into the more philosophical realm of the role of the state when he discusses the defense budget.  Samuelson argues that cuts to defense should not be treated the same as cuts in other areas of the national budget because "[n]ational security is government's first job."  He, unfortunately, does not take this to the next level, namely by opening a discussion on what the proper role of government is.  Government's role within society has expanded enormously and if America is to not only solve its budgetary issues but also resolve the government's wayward drift, the people need to pin down what, philosophically speaking, the purpose of government is.