Category Archives: US Debt

Henninger: Escape From Spending Hell

Well, have something to add?
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So it looks like we’ve all been sentenced to spending at least two more years in budget hell with Barack Obama. Under the rules of budget hell set the past four years by the prince of Pennsylvania Avenue, you’re not allowed to do anything real about federal spending. You can only fight over federal spending. Forever.

Paul Ryan on Tuesday tossed his third House GOP budget into this void. He hopes to reduce long-term spending to an average of 19.5% of GDP. The Beltway press called it an opening “salvo.” Yesterday his Senate counterpart, new Budget Committee Chair Patty Murray, introduced the Democrats’ budget, teeing up what the Washington Post called a “budget duel.” Welcome to the Obama street-fighting army, Sen. Murray.

All hope is not lost. Amid the sequester smackdown with the White House, Republicans did something off-script: They called the Obama bluff. They let the sequester’s spending cuts occur, and the apocalypse didn’t descend. The only thing that cracked was the president’s approval rating.

The sequester’s big discovery was that spending reduction isn’t a political third rail. But if the winds are starting to shift, Republicans are going to need all the help they can get to convince the American people that more cuts in spending will preserve and protect their economy.

Help is at hand—economist Alberto Alesina.

Mr. Alesina, a professor at Harvard University, may be the last economist that Democrats want to deal with at the moment Americans are finding sympathy for spending cuts.

Ever since Ronald Reagan legitimized the efficacy of tax cuts, Democrats have sought to discredit his idea and restore the New Deal theory of a Keynesian multiplier, which dates to 1931. It holds that more public spending will revive a struggling economy.

No president has believed more in the miracle of the multiplier than Barack Obama. Across four years he has led the country on a kind of Keynesian death march, pushing federal spending to 25% of GDP and producing weak growth. We’re looking at four more years before the Keynesian mast unless the Republicans can offer an intellectually respectable alternative.

Mr. Alesina has identified the alternative. His, and others’, work the past decade with how struggling economies revive suggests that the Obama spend-more solution is the opposite of what the U.S. should be doing.

There is general agreement on at least two things about the current U.S. economy. It is emerging from the deepest recession since the Great Depression, and its debt level is unsustainable. The path back to stronger growth, argues Mr. Alesina, is a combination of significant, permanent cuts in public spending and relatively small tax increases, if any.

This view isn’t born of “right-wing” ideology. Mr. Alesina is an Italian, as are many of his co-authors. As Europeans, Mr. Alesina and his colleagues were forced to confront the biggest challenge facing Western economies the past 40 years. Europe rose from the ashes of war, but how would it rise from the ashes of debt, as benevolent postwar spending programs outstripped revenue?

Mr. Alesina and his colleagues wanted to answer the most basic question: What works?

They sought the answer (which they published in an August 2012 paper on “fiscal consolidations” for the National Bureau of Economic Research) by analyzing an International Monetary Fund history of all the fiscal plans that 17 OECD governments enacted between 1978 and 2009, including the U.S., Canada and Japan. Together, these countries tried everything to grow—raise spending, cut spending, raise taxes or cut them, in endless combinations. What helped?

“Adjustments based upon spending cuts,” the economists concluded, “are much less costly in terms of output losses than tax-based ones. Spending-based adjustments”—that is, cuts—”have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments”—tax increases—”have been associated with prolonged and deep recessions.”

The debate over “failed austerity” is misleading because it emphasizes spending cuts but rarely mentions tax increases. “Austerity” plans, the Alesina studies suggest, fail to revive growth when they too heavily rely on raising taxes on income and capital—as across Europe and now in the U.S.

There is no magic ride back to prosperity. The Alesina team is describing the least-bad antidote for the long-term poison of destructive national debt. Fiscal plans based on large, permanent spending cuts are associated with renewed growth more than any alternative policy mix that has been tried. Indeed, spending cuts without big tax increases look to be the only thing that really works. The leading example the past 15 years is . . . Canada. And just an observation: The Dow proceeded to its high after the sequester happened. The cuts were the first credible step in rebuilding private-sector confidence.

The Patty Murray budget: A $975 billion spending cut and a $975 billion tax increase.

The Paul Ryan budget: $4.6 trillion of spending cuts and no new taxes beyond the fiscal-cliff increases.

Neither budget is anything the world has never seen. The available record suggests which of the two is the road to perdition.

Write to henninger@wsj.com
Henninger: Escape From Spending Hell – WSJ.com.

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Unraveling Navys Decision on USS Truman

Hmmm. More political gamesmanship?
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Little in the polarized debate over the spending cuts that took effect Friday has engendered the level of rancor as did the U.S. Navy’s decision to delay deploying an aircraft carrier to the Persian Gulf.

Some Republicans questioned whether the Obama administration was playing politics with America’s national security. Others have asked if the Navy could have cut the more than $300 million from other programs. Still others wondered whether the Pentagon was using budget constraints as cover to implement a broader policy shift.

The answers are as tangled as Washington’s attempts to free itself from the political impasse that triggered the controversial Navy decision.

For instance, military officials freely admit they could have found ways to save money other than keeping the USS Harry S. Truman docked in Virginia—though it isn’t nearly that simple, of course.

The painful spending cuts called the sequester are finally here. WSJ’s Julian E. Barnes and Colleen McCain Nelson discuss the real effects – including military preparedness – as well as the significant political risk for President Obama and Republican lawmakers.

The Navy’s aircraft-carrier problem stretches back more than two years, when military leaders responsible for the Middle East and South Asia asked the Pentagon to assign two aircraft carriers to operations in the Persian Gulf to help support the military surge under way at the time in Afghanistan.

The Defense Department agreed to the request. But the decision at the end of 2010 came without additional funding, military officials said, putting a strain on the Navy budget.

In 2011, the Budget Control Act imposed $487 billion in Defense Department cuts over the next decade.

Fiscal constraints tightened with Washington’s failure to pass a fiscal 2013 budget, imposing additional restrictions on how the Pentagon, along with the rest of the federal government, can spend its money.

The arrival of across-the-board spending cuts under sequestration created a fourth budget squeeze and prompted the Navy to rethink how it used its fleet of 10 nuclear-powered aircraft carriers. The conclusion: Sending the Truman to the Gulf as planned would have exerted unacceptable strains on the Pentagon. Barring a budget deal, the Navy could have been prevented from retaining a carrier presence in the region through the end of this year.

Military officials concluded that, with the war in Afghanistan winding down, they would be better off to free up the fleet by ending the commitment to two aircraft carriers in the Persian Gulf. The more than $300 million in savings could be used to continue to prepare, equip and train, allowing the Navy to keep one carrier in the Gulf through 2014.

California Rep. Howard ‘Buck’ McKeon, the head of the Armed Services Committee, tells WSJ’s Jerry Seib he is “very concerned” about how the defense portion of the sequester cuts will affect American troops.

“There are a lot of things that go into that decision: Some of it is money, some of it is availability of ships, some of it is threat,” said one military official. “As you’re going through the ledger books, it’s obvious that there was an ability where we could garner savings and readiness.”

Keeping the Truman in port, where it is prepared to respond to unexpected problems, raised questions among some critics who suggested that the decision was intended to put pressure on Republicans to capitulate in negotiations with President Barack Obama.

“I don’t believe there is internal Pentagon politics at play, but I am skeptical of the decision,” said Rep. Randy Forbes, (R., Va.), who chairs the House Armed Services Seapower and Projection Forces Subcommittee.

Pentagon officials said the Truman delay was approved by then-Defense Secretary Leon Panetta in consultation with the Navy. The Navy’s position was backed by Gary Roughead, a retired admiral who served as chief of naval operations when the military first ramped up its carrier presence in the Gulf. “They had to make some very, very hard decisions, and none of the solutions are good, but you just have to make the best of what you have,” he said.

Richard Danzig, who served as secretary of the Navy under President Bill Clinton, agreed. “They had a pretty clear choice: Have a carrier through the summer and none in the fall, or have one now and one through next year,” he said. “I don’t regard that as political grandstanding in the least.”

The wars in Iraq and Afghanistan have placed demands on the carrier fleet that are manifesting themselves in various ways. Last fall, deployment of the USS Nimitz was delayed by unexpected repairs, creating unplanned scheduling problems.

“Even without sequestration, I still think we would have had a carrier problem,” said an aide to Sen. James Inhofe (R., Okla). “Due to unforeseen events and the high deployment tempo of the carrier fleet, the cycle for a few very critical carriers has gone askew and put additional strain on the carrier fleet.”

For the most part, the scrutiny of the Truman decision has overlooked the larger policy shift that ended the commitment to keep two aircraft carriers in the Persian Gulf.

That issue is expected to come up next week when Marine Gen. James Mattis, the head of U.S. Central Command, appears before the Senate Armed Services Committee.

“Is there some kind of assessment on Iran or the Gulf that provides a rationale or a justification for that decision?” asked one Senate aide. “Is it being driven by the budget—or by a strategic decision?”

Write to Dion Nissenbaum at dion.nissenbaum@wsj.com

A version of this article appeared March 2, 2013, on page A4 in the U.S. edition of The Wall Street Journal, with the headline: Unraveling Navy’s Decision on USS Truman.Unraveling Navys Decision on USS Truman Amid Sequester – WSJ.com.

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Book Review: Coolidge

Good article to help you brush up on your history… which I needed.
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By ROBERT MERRY

‘Debt takes its Toll.’ Thus does Amity Shlaes begin her biography of Calvin Coolidge, the laconic, flinty-faced New Englander who became America’s 30th president upon the death of Warren Harding in 1923 and then captured the office in his own right in 1924. Ms. Shlaes, the author of a best-selling history of the Great Depression, “The Forgotten Man” (2007), issues her debt admonition in the course of introducing Oliver Coolidge, a brother of Silent Cal’s great-grandfather, who went to jail in 1849 because he couldn’t pay a $29.48 debt to a neighbor. She then glides briskly from Oliver’s plight to the problem of government debt, particularly when it reaches proportions that threaten the public fisc and undermine national confidence. “There have been times,” Ms. Shlaes writes in the introduction to “Coolidge,” “when debt pinned down the United States as it once pinned down Oliver.”

 

Calvin Coolidge lived in such a time—as do we. At the end of World War I, the national debt stood at $27 billion, nine times its level before the war. But Coolidge, and Harding as well, slashed the country’s credit obligation to just $17.65 billion. They did it by cutting taxes, generating economic growth and, in the process, flooding federal coffers with surplus dollars. This accomplishment merits attention today, with the national debt exceeding $16 trillion—more than 70% of gross domestic product. If that number hits 90%, some economists warn, it will squeeze the national economy inexorably.

And if that crisis hits, the country will face a binary choice. It can return to a free-market system of lower taxes, smaller government and the curtailment of the Federal Reserve’s promiscuous fiat monetary policies—in short, abandoning Keynesian sensibilities and the trend toward European-style social democratic governance. Or it can opt for what energy-industry executive Jay Zawatsky has called “increasing financial repression”—further federal spending and intrusion into the economy, rising tax rates on the wealthy, ever greater federal debt financed by Fed money creation and, eventually, rising inflation.

To understand the first option, it is necessary to understand the 1920s. And we can’t understand the 1920s without peering into the life and politics of Calvin Coolidge—”principally a man of work,” as Ms. Shlaes describes him, “a minimalist president, an economic general of budgeting and tax cuts.” Her biography is thus both timely and important.

Coolidge was born in 1872 in Plymouth Notch, Vt., where folks frowned on showy talk and artifice. Its physical and cultural center was the country store, run by Calvin’s father, John, who also farmed and served in the Vermont legislature. Young red-haired Calvin was a quiet lad—and painfully shy. He “found it agonizing to meet even the adults who entered his parents’ front rooms,” Ms. Shlaes writes. But in that austere environment he learned the skills needed “for the eternal combat with the landscape.” Life was harsh in that place and time: His mother died when Calvin was 12, his sister six years later.

At the Black River Academy, a boarding school in Ludlow, Vt., young Calvin posted mediocre grades initially and demonstrated little skill for athletics or the arts of social advancement. He loved to read, and legend had it that he devoured every book in the school library. By graduation he had managed to boost his marks to a respectable level, demonstrating a characteristic trait: He was a slow starter, disoriented in new situations but increasingly impressive as he gained comfort with his surroundings.

The pattern repeated itself at Amherst College. “I think I must be very home-sick,” he wrote his father after his arrival on campus, “my hand trembles so I can’t write so any one can read it.” But over time he advanced academically and socially. “I am confident,” he later wrote home, “I have gained a power of grappling with problems that will stand by me all my life.” By graduation he had opted for a legal career, with an inclination toward politics.

After an apprenticeship, he joined a law firm in Northampton, Mass., where locals warmed to his terseness of expression (they didn’t like being billed for long-winded advice) and his skill settling disputes without litigation. Small-town legal work didn’t make him rich, but it gave him a base for political pursuits. In 1898, at age 26, he became a city councilman and thereafter interspersed his legal practice with ever-higher electoral positions—city solicitor, clerk of courts, state representative, Northampton mayor, state senator, Senate president, lieutenant governor. In 1918, at age 46, he was elected Massachusetts governor.

Along the way he gained a wife, Grace Goodhue, a pert and lovely graduate of the University of Vermont. A Coolidge exchange with Grace’s father reflects the spare mode of New England expression: “Up here on some law business, Mr. Coolidge?” “Come to see about marrying Grace.”

When the couple married in 1905, the wife of one friend observed, “I don’t see how that sulky red-haired little man ever won that pretty, charming woman.” Living simply, the Coolidges avoided debt, renting their home to avoid even the burden of a mortgage. “Coolidge,” writes Ms. Shlaes, “did not like to be beholden to bankers or anyone else.”

As a politician, Coolidge came under the sway of the Republican progressive movement, personified with dramatic flair by Theodore Roosevelt. In the state Senate, Coolidge voted for women’s suffrage, a state income tax, a minimum wage for female workers and salary increases for teachers. Like Roosevelt, he calculated that Republicans could thwart Democratic inroads on such causes by pre-empting them.

But Coolidge soon began to question progressivism, including Roosevelt’s resolve to regulate railroad rates through his Hepburn Act. He saw that railroads, though rich and powerful, operated on the margin. As Ms. Shlaes explains: “The blow Roosevelt had struck to reduce the power of the railroads might be crippling them instead.” And by undermining the profitability of cross-country shipping, the act undermined U.S. trade with China and Japan.

Coolidge was struck by the radicalism of some labor leaders when, as a state senator, he helped broker an employment agreement between woolen workers and their managers. In a letter he wrote that the leaders of the Industrial Workers of the World, the famed Wobblies, were “socialists and anarchists” bent on destroying “all authority, whether of any church or government.”

As Massachusetts governor in 1919, Coolidge gained widespread fame when Boston policemen went on strike, unleashing looting, property destruction and street thuggery. A crippling general strike loomed, and violence was on the rise. A watchful nation feared spreading lawlessness. After trying a conciliatory approach, Coolidge turned implacably decisive. Working through the police chief, he fired the striking policemen and moved to restore order by calling in steel-helmeted state guardsmen. “There is no right to strike against the public safety,” he declared, “by anybody, anywhere, any time.

Ms. Shlaes’s story, constructed as a kind of chronological diary, has a disjointed quality, as descriptions of powerful events that generate mounting reader interest get interrupted by less consequential matters that break the narrative. This is not a biography for those in search of gripping drama. But the research is exhaustive, and the political and economic analysis sound. These aspects come to the fore especially in the concluding sections of the book, as the White House comes into view.

In 1920, Coolidge emerged as the running mate to Republican presidential candidate Warren Harding, an intellectually lethargic man who nonetheless understood the need to remake the GOP into a more conservative party and move the country in a new direction. President Woodrow Wilson’s postwar economy was in free fall, and the country needed a new economic philosophy to get beyond the Wilson mess.

Harding’s watchword was “normalcy”—meaning, as Ms. Shlaes describes it, “low taxes, tariffs, less central government, and stability.” He won in a landslide, a clear repudiation of Wilson’s progressive policies, and quickly moved, at the counsel of Treasury Secretary Andrew Mellon, to cut taxes and restore the economy. The aim, says Ms. Shlaes: “to retire debt, not to expand it.”

The new direction was well-established by August 1923, when Harding died unexpectedly at age 57, most likely from congestive heart failure. But Mellon believed the new president could generate continuing economic growth through greater application of a “scientific taxation” concept—”supply side” economics, in today’s parlance—designed to generate economic activity, and federal revenue, by reducing top marginal tax rates. In Coolidge’s time, as today, the concept stirred widespread skepticism.

Coolidge sent to Congress a “scientific taxation” bill that he hoped to get passed before he faced the voters in 1924—proposing to lower the top tax rate to 30% or even 25% from 50% (it had been 77% when Harding took office). The party establishment in Congress watered it down, leaving the top tax rate at 43.5% and directing most of the tax relief to middle-income Americans. Though disappointed, Coolidge signed the bill with a resolve to revisit the matter after his election, in which he defeated Democratic candidate John W. Davis by a decisive margin.

He eventually got the top rate down to 25%. The GDP soared, increasing by 25% during the Harding-Coolidge years. The result, coupled with fiscal austerity, was a nation flush with tax receipts—surpluses of $100 million in 1925, $375 million in 1926 and nearly $600 million the next year.

The Coolidge years represent the country’s most distilled experiment in supply-side economics—and the doctrine’s most conspicuous success. That success is the central Coolidge legacy, brought home with telling authority in Ms. Shlaes’s work. This book’s time is propitious. As the nation faces a looming economic crisis wrought in large measure by mounting public debt, the Coolidge experiment offers insights into what an alternative course might look like. Ms. Shlaes has given us a detailed examination of that alternative course.

Mr. Merry, editor of the National Interest, is the author of “Where They Stand: The American Presidents in the Eyes of Voters and Historians.”

A version of this article appeared February 9, 2013, on page C5 in the U.S. edition of The Wall Street Journal, with the headline: Calvin Coolidge for President.
Book Review: Coolidge – WSJ.com.

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Debt Excess Even Lives in Texas

“Every ballot to issue new bonds should say how much debt is already outstanding, and what it costs each year.”

Exceptional. Right on the money!
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By SUSAN COMBS

Austin, Texas

Federal, state and local governments have generated millions of pages of unreadable prose laying out rules and regulations and asserting their authority over our lives. But the whole nation began with a Declaration of only about 1,300 well-chosen words—and perhaps the most important are the words that say governments derive their powers “from the consent of the governed.”

Is that what America’s leaders have today? It’s hard to argue that they do, given their bottom-of-the-barrel approval ratings. Instead of consent, the best most government officials can hope for from taxpayers is a bone-tired, cynical acquiescence. For the people who spend tax dollars, that may be enough.

But it shouldn’t be enough for the people who actually pay the bills. Taxpayers have a right—and, more important, a responsibility—to see how their money is spent.

It’s not just federal spending. As the chief financial officer of the nation’s second-largest state, even I have found it hard to get a handle on how much governments are spending, and how much debt they’re taking on. Every level of government is piling up incredible bills. And they’re coming due, whether we like it or not.

Even in low-tax Texas, property taxes have risen three times faster than the inflation rate and four times faster than our population growth since 1992. Our local governments, meanwhile, more than doubled their debt load in the last decade, to more than $7,500 in debt for every man, woman and child in the state. In Houston alone, city-employee pension plans are facing an unfunded liability of $2.4 billion.

But too many taxpayers aren’t given the information they need to make informed decisions when they vote debt issues. Recently I spent several months holding about 40 town-hall meetings with Texans across our state. Each time, I asked the attendees if they could tell me how much debt their local governments are carrying. Not a single person in a single town had this information.

It often takes significant time and effort to find out. But even so: Wise up, folks. You need to know what government is doing, and how it spends your money. Ignorance is a luxury you can’t afford, not when tax increases and spiraling debt are taking away the very incentives that make people want to take risks and get ahead.

Apathy costs money. In Texas, local debt generally is approved by shockingly low shares of the electorate, often with turnouts of less than 10%. That leads to just the kind of oversight you’d expect: We’ve found that some apparently similar school-construction projects cost 2½ times as much per square foot as others, for no obvious reason.

So how can we turn this around? I believe the answer is that information drives action.

• The first step for many Americans may be simply identifying all the authorities that tax them. In some areas, you may be paying taxes to the state, a city, a school district, a hospital district, a port authority . . . the list goes on. You can’t confront these entities about spending and debt if you don’t even know who they are.

• The second step is to agitate for some common-sense changes that will put vital information about government spending and debt in front of the public. That will limit governments’ ability to make an end run around your wishes.

We should, for instance, strive to limit all the various mechanisms that governments have crafted to get around the usual requirement for voter approval of new debt. In Texas, we have an instrument called “certificates of obligation.” Other vehicles used around the country include lease-purchase financing, lease-revenue bonds and “certificates of participation.” Regardless of the name, they’re all designed to allow governments to sell debt without your permission. The practice should be limited—and watched closely.

• Another key reform would make it impossible to vote on debt in a vacuum. Most people don’t have the first idea of how new proposed debt fits into the total debt being carried by their local governments. Every ballot in an election for new bonded indebtedness should state, at minimum, the current amount of outstanding debt and annual debt-service payments, and show how the proposed debt will affect the tally.

• Because most education debt is used for school construction, school districts should be required to provide essential information on the Web about the cost of each new facility. The information would include the cost per square foot of construction and the number of square feet per student. Voters would then be able to make meaningful comparisons—and ask the right questions.

• Given the dire financial conditions of many public-employee pension systems, the systems should be required to publicly report net investment returns for each of the past 10 fiscal years, as well as one-year, three-year, five-year, 10-year, 30-year and since-inception rolling rates of return. We need to know whether projections ever match actual returns or if these government pensions are selling us a bill of goods.

• Finally, given the growth of special districts with taxing authority, each district should be required to perform a self-evaluation every few years to ensure that it continues to fulfill its mission and further a public good. This information should be posted online, so you can determine if your money is being used for the purpose that was intended.

These are basic but essential steps that could be implemented in every state across the country. They would give taxpayers the same kind of information on government debt and spending that they’d need to prepare and balance their own budgets, to handle a mortgage or buy a car—a clear knowledge of what we’re spending and what we owe.

Unchecked and invisible debt and out-of-control spending are putting the nation in real jeopardy, and too many public officials seem happy to keep you in the dark. It’s up to you to demand that the lights be turned on—before it’s too late.

— Ms. Combs is the Texas Comptroller of Public Accounts. Her office has released a series of reports on government debt that can be found at www.TexasItsYourMoney.com.

A version of this article appeared January 19, 2013, on page A11 in the U.S. edition of The Wall Street Journal, with the headline: Debt Excess Even Lives in Texas.

Susan Combs: Debt Excess Even Lives in Texas – WSJ.com.

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