The Fiscal Cliff and Congressional Dysfunction

From David Boaz, at Cato:

Annual federal spending rose by a trillion dollars when Republicans controlled the government from 2001 to 2007. It has risen another trillion during the Bush-Obama response to the financial crisis. So spending every year is now twice what it was when Bill Clinton left office, and the national debt is three times as high. Republicans and Democrats alike should be able to find wasteful, extravagant, and unnecessary programs to cut back or eliminate. And yet many voters, especially Tea Partiers, know that both parties have been responsible. Most Republicans, including today’s House leaders, voted for the No Child Left Behind Act, the Iraq war, the prescription drug entitlement, and the TARP bailout during the Bush years. That’s why fiscal conservatives should look very skeptically at the “fiscal cliff” and “grand bargain” proposals, most of which promise to cut spending some day—not this year, not next year, but swear to God some time in the next 10 years. As the White Queen said to Alice, ”Jam to-morrow and jam yesterday—but never jam to-day.” Cuts tomorrow and cuts in the out-years—but never cuts today.

If the “dysfunctional” fight that has sent us to the edge of the fiscal cliff finally results in some constraint on out-of-control spending, then it will have been well worth all the hand-wringing headlines. But that doesn’t seem likely. The problem is not a temporary mess on Capitol Hill and not a mythical default; it’s spending, deficits, and debt.

The entire political class is the problem, but again, the first order of business is getting the Democrats out of power.

Fiscal Cliff: $536 Billion Tax Hikes Over the Edge; Recession Risk

At IBD, "Fiscal Cliff: $536 Billion In Tax Hikes Over the Edge":

Even for those who aren't afraid of heights, peering over the fiscal cliff may be dizzying. The plunge in after-tax income that would occur in a worst-case scenario likely would put the economy back in a deep recession.

Yet a peek over the edge now seems unavoidable, at least according to Senate Majority Leader Harry Reid:

"It looks like that's where we're headed," Reid said in a Senate floor speech on Thursday.

So here's what the view looks like. The fiscal cliff is composed of $536 billion in 2013 tax hikes, the Tax Policy Center says.

The biggest tax hikes would be an end to President Bush's 2001 and 2003 income and investment tax cuts and President Obama's 2 percentage point payroll tax cut.

But that's just the beginning. Nearly 90% of households would face an average tax increase close to $3,500.

The fiscal cliff also would trigger roughly $115 billion in automatic spending cuts.

More at the link.

And at Instapundit, "COMMENT OF THE DAY":

“For ten years we have been told that the Bush tax cuts applied mostly to the rich. Now it is imperative that we extend them further or the middle class is going to take a big hit.”

Progressives suck.

Fiscal Cliff Reveals Long-Term Partisan Divide

Following up on my report yesterday, "America's Crisis of Big Government Cronyism and Corruption."

Here's Ronald Brownstein, at National Journal, "The Fiscal Cliff's Greatest Threat Is to American Unity":

The real issue in the frantic final flailing over the fiscal cliff isn’t whether Washington can balance its books. It’s whether blue America and red America are capable of, or even interested in, mediating their differences. The evidence is growing more discouraging.

Across almost every front, the process of pulling apart that has reshaped the political landscape over the past generation appears to be accelerating.

At the national level, President Obama and Mitt Romney mobilized almost mirror-image coalitions. Over 40 percent of Obama’s votes came from minorities; nearly 90 percent of Romney’s votes came from whites. Obama won three-fifths of voters under 30; Romney won more than three-fifths of white seniors.

Compared with Democrats, Republicans since the 1980s have been a more ideologically homogenous party that is more resistant to compromise—as last week’s rejection of House Speaker John Boehner’s fiscal “Plan B” demonstrated. (Electoral incentives help explain that imbalance: Because self-identified conservatives outnumber liberals among voters, Democrats in most places need to carry more moderates to win than Republicans do, and that creates greater pressure on Democrats to compromise.) But after an election in which Obama won despite historic deficits among the blue-collar and older whites that once anchored the conservative end of his party’s coalition, ideological cohesion is rising among Democrats too.

Consider the profile of Obama and Romney voters that Emory University political scientist Alan Abramowitz traces in an upcoming paper. In the Election Day exit poll, three-fourths of Obama voters said that government should be doing more to solve problems, while over four-fifths of Romney voters said that it is already doing too much. More than four-fifths of Obama voters wanted to maintain or expand his health care law, while nearly nine-in-10 Romney voters backed its repeal. Three times as many Obama voters as Romney voters supported legalizing gay marriage.

This same pulling apart is evident in the states. Eighteen states—what I’ve called the “blue wall”—have voted Democratic in at least the past six presidential elections. After November’s ballot victories in Maine, Maryland, and Washington, seven of them have now authorized gay marriage and six others have approved civil unions or broad domestic partnership rights for same-sex couples. Depending on how legislative or court fights unfold, it’s conceivable that California and New Jersey, two blue-wall states, could approve same-sex-marriage ballot initiatives by 2016. Meanwhile, virtually every Republican-leaning state has barred gay marriage.

Similarly, 14 governors have agreed to join the expansion of Medicaid that represents one pillar of the Obama plan to cover the uninsured; Nevada’s Brian Sandoval is the only Republican among them. Almost all Republican governors also let the deadline pass earlier this month without establishing the online exchanges that comprise the other big coverage expansion. Even after Obama’s victory eliminated the possibility that his health reform bill would be repealed, Republican governors are continuing what amounts to a sit-down strike against it.

This centrifugal tendency is now embedded in Congress’s DNA. As split-ticket voting has declined, fewer legislators in each party are elected, in effect, behind enemy lines (by voters who usually prefer the other party for the White House).

Michael Franc, vice president for government studies at the conservative Heritage Foundation, correctly observes that because of that dynamic, during a confrontation like the fiscal cliff, most legislators are more likely to face demands to stand firm than complaints about inflexibility. “When everybody goes back home, I don’t think they are feeling the heat from their constituents” for failing to reach agreement, Franc says. “If anything, they are hearing the opposite. So ... there’s no rational political incentive to back down.”

There's more at that top link. Brownstein concludes by lamenting the nation's "fraying sense of common purpose." Actually, that's not what the data are telling us. All those constituents back home in the red districts don't want America moving further into the socialist orbit, becoming a Sweden, or worse, a Cuba. The Democrats cling to power with a coalition of dependents. The Democrats welcome all manner of hard-line socialists and collectivists into their midst. And the president himself leads the morally bankrupt intransigence in government. It's all about punishing the successful demographics in the name of fairness. Screw these people. Republicans need to stay strong against the onslaught.

PHOTO: The White House Flickr page.

America's Crisis of Big Government Cronyism and Corruption

The January/February issue of Foreign Affairs is now available online. I just finished reading Fareed Zakaria's marquee essay, "Can America Be Fixed? The New Crisis of Democracy." While I disagree little on the problems we face, I differ substantially on the remedies he identifies. (And my respect for the man has plummeted over the years amid his increasingly predictable progressive sensibilities, but especially of late because of the allegations against him this year of plagiarism, for which he acknowledged and apologized for publicly, with permanent damage to his reputation.)

The article is gated but a quick summary and block quotes are sufficient for the purposes here. Zakaria sees the fiscal cliff stalemate as a signal of our political immobility. The gridlock we're facing means that the political establishment once again is delaying needed reforms on some of the biggest problems facing the country, most notably for Zakaria infrastructure and entitlements. The fatal flaw of the piece is that Zakaria's a hopeless advocate for expanding the size and scope of government. He actually offers an excellent discussion of the entitlement problem, but he refuses to see any role for markets and for the possibility of scaling back government commitments. His biggest problem is on infrastructure. Again, while he puts his finger on the problem quite deftly, he ignores some facts that make his case problematic --- one of the biggest being the fact that the U.S. spent nearly $1 trillion in "infrastructure" and "investment" in the Obama administration's 2009 stimulus legislation, and the country has virtually nothing to show for it in terms of long-term economic growth. Indeed, the administration's stimulus was a crony capitalist boondoggle that will likely be repeated again and again if the so-called investments Zakaria proposes are to indeed become public policy. In any case, some key block quotes. Here's a bit on the problems identified in the paper:

As the United States continues its slow but steady recovery from the depths of the financial crisis, nobody actually wants a massive austerity package to shock the economy back into recession, and so the odds have always been high that the game of budgetary chicken will stop short of disaster. Looming past the cliff, however, is a deep chasm that poses a much greater challenge -- the retooling of the country's economy, society, and government necessary for the United States to perform effectively in the twenty-first century. The focus in Washington now is on taxing and cutting; it should be on reforming and investing. The United States needs serious change in its fiscal, entitlement, infrastructure, immigration, and education policies, among others. And yet a polarized and often paralyzed Washington has pushed dealing with these problems off into the future, which will only make them more difficult and expensive to solve....

Is there a new crisis of democracy? Certainly, the American public seems to think so. Anger with politicians and institutions of government is much greater than it was in 1975. According to American National Election Studies polls, in 1964, 76 percent of Americans agreed with the statement "You can trust the government in Washington to do what is right just about always or most of the time." By the late 1970s, that number had dropped to the high 40s. In 2008, it was 30 percent. In January 2010, it had fallen to 19 percent.

Commentators are prone to seeing the challenges of the moment in unnecessarily apocalyptic terms. It is possible that these problems, too, will pass, that the West will muddle through somehow until it faces yet another set of challenges a generation down the road, which will again be described in an overly dramatic fashion. But it is also possible that the public is onto something. The crisis of democracy, from this perspective, never really went away; it was just papered over with temporary solutions and obscured by a series of lucky breaks. Today, the problems have mounted, and yet American democracy is more dysfunctional and commands less authority than ever -- and it has fewer levers to pull in a globalized economy. This time, the pessimists might be right.

And here's the key bit on "infrastructure investment":

If the case for reform is important, the case for investment is more urgent. In its annual study of competitiveness, the World Economic Forum consistently gives the United States poor marks for its tax and regulatory policies, ranking it 76th in 2012, for example, on the "burden of government regulations." But for all its complications, the American economy remains one of the world's most competitive, ranking seventh overall -- only a modest slippage from five years ago. In contrast, the United States has dropped dramatically in its investments in human and physical capital. The WEF ranked American infrastructure fifth in the world a decade ago but now ranks it 25th and falling. The country used to lead the world in percentage of college graduates; it is now ranked 14th. U.S. federal funding for research and development as a percentage of GDP has fallen to half the level it was in 1960 -- while it is rising in countries such as China, Singapore, and South Korea. The public university system in the United States -- once the crown jewel of American public education -- is being gutted by budget cuts.

The modern history of the United States suggests a correlation between investment and growth. In the 1950s and 1960s, the federal government spent over five percent of GDP annually on investment, and the economy boomed. Over the last 30 years, the government has been cutting back; federal spending on investment is now around three percent of GDP annually, and growth has been tepid. As the Nobel Prize-winning economist Michael Spence has noted, the United States escaped from the Great Depression not only by spending massively on World War II but also by slashing consumption and ramping up investment. Americans reduced their spending, increased their savings, and purchased war bonds. That boost in public and private investment led to a generation of postwar growth. Another generation of growth will require comparable investments.

The problems of reform and investment come together in the case of infrastructure. In 2009, the American Society of Civil Engineers gave the country's infrastructure a grade of D and calculated that repairing and renovating it would cost $2 trillion. The specific number might be an exaggeration (engineers have a vested interest in the subject), but every study shows what any traveler can plainly see: the United States is falling badly behind. This is partly a matter of crumbling bridges and highways, but it goes well beyond that. The U.S. air traffic control system is outdated and in need of a $25 billion upgrade. The U.S. energy grid is antique, and it malfunctions often enough that many households are acquiring that classic symbol of status in the developing world: a private electrical generator. The country's drinking water is carried through a network of old and leaky pipes, and its cellular and broadband systems are slow compared with those of many other advanced countries. All this translates into slower growth. And if it takes longer to fix, it will cost more, as deferred maintenance usually does.

Spending on infrastructure is hardly a panacea, however, because without careful planning and oversight, it can be inefficient and ineffective. Congress allocates money to infrastructure projects based on politics, not need or bang for the buck. The elegant solution to the problem would be to have a national infrastructure bank that is funded by a combination of government money and private capital. Such a bank would minimize waste and redundancy by having projects chosen by technocrats on merit rather than by politicians for pork. Naturally, this very idea is languishing in Congress, despite some support from prominent figures on both sides of the aisle.

The same is the case with financial reforms: the problem is not a lack of good ideas or technical feasibility but politics. The politicians who sit on the committees overseeing the current alphabet soup of ineffective agencies are happy primarily because they can raise money for their campaigns from the financial industry. The current system works better as a mechanism for campaign fundraising than it does as an instrument for financial oversight.

In 1979, the social scientist Ezra Vogel published a book titled Japan as Number One, predicting a rosy future for the then-rising Asian power. When The Washington Post asked him recently why his prediction had been so far off the mark, he pointed out that the Japanese economy was highly sophisticated and advanced, but, he confessed, he had never anticipated that its political system would seize up the way it did and allow the country to spiral downward.

Vogel was right to note that the problem was politics rather than economics. All the advanced industrial economies have weaknesses, but they also all have considerable strengths, particularly the United States. They have reached a stage of development, however, at which outmoded policies, structures, and practices have to be changed or abandoned. The problem, as the economist Mancur Olson pointed out, is that the existing policies benefit interest groups that zealously protect the status quo. Reform requires governments to assert the national interest over such parochial interests, something that is increasingly difficult to do in a democracy.

Every now and then we see a new story on some collapsed bridge tragedy or massive urban flooding from busted water mains or broken levees, and on cue progressives start wagging their fingers about how we've got to start spending on infrastructure. I don't research this area but my regular reading on the politics of the stimulus isn't very reassuring. The administration's push for "investments" was mostly about the Democrat politics of job creation, and that didn't turn out so well. Conn Carroll has a good example, "$787 Billion in Stimulus, Zero Jobs “Created or Saved”." And while Zakaria's obsessed with government spending as "investmnent," there's little in the record of the last couple years that recommends doubling-down on it. See Romina Boccia, "New Stimulus Plan Same as the Old: Spend, Spend, Spend." And notice while Zakaria minimizes the corruption inherent in "infrastructure" spending as possibly "inefficient and ineffective," the facts of the past few years are devastating to his case. See Veronique de Rugy, "Stimulus Cronyism." And Michelle Malkin, "Obama's $50 Billion Union Infrastructure Boondoggle."

The United States is not some developing country that's going to be eviscerated by "draconian" spending cuts or devastated by some horrible "austerity package" that leaves the poor to fend for themselves. That's Krugmanite scare-mongering. We need to unleash the natural dynamism of the American economy. To put it as plainly as possible: We need robust and sustained economic growth, in the 4 or 5 percent range. We need to increase incentives for private investment. We need to reduce regulations and taxes on business job creators. And we need to rely on the system of federalism to shift real infrastructure investment from the federal to state governments. This isn't rocket science. The solutions to America's economic problems are self-evident. And the political crisis is largely one of a dramatically changed American electoral and political demographic. As the population base of the Democrat Party comes to increasingly favor policies of dependency, the productive, working sectors of the economy are required to bear a heavier load to keep everything afloat. Tea party Republicans, bless them, are resisting higher taxes because they know that'll be more of the same. As noted here yesterday, President Obama's not interested in fixing our politics or avoiding a recession should we go over the fiscal cliff. He's obsessed with punishing the most productive members of society in furtherance of his class warfare agenda of reducing inequality and promoting social justice. As long as we have one party that is objectively uninterested in growing the economy to create a rising tide that lifts all boats we will continue to have a crisis of political immobility. The electorate can fix the problem by choosing a government not fatally infected with cronyism and corruption. Both parties are implicated, although getting the Democrats out of power is the first order of business. We need to restore our faith in liberty and markets and unleash the innate innovation and dynamism of the individual. Our crisis is one of big government. Obama hasn't even been sworn in for a second term and its already clear that the public was duped in November. We must keep on with the hard work of real reform, which is what the tea party has represented, smaller government and fiscal responsibility. Without that we'll continue to stagnate and ultimately perish like the beached whale on the sand at Barbra Streisand's oceanfront estate.

BONUS: Zakaria dismisses the late Samuel Huntington's work in this report from the '70s-era Trilateral Commission: "The Crisis of Democracy." But our prospects for reform would be immeasurably greater if had more voices like Huntington's a less of those like Zakaria's.

ADDED: Linked at Blazing Cat Fur and Lonely Conservative. Thanks!

Brisk Sales Point to Breakout Holiday Shopping Season

At LAT, "Shopping season off to strong start":

Opening their doors earlier than ever for Black Friday paid off for retailers as shoppers mobbed malls thick with sales across the Southland, snapping up electronics, toys and other deals.

Hundreds of bargain hunters surged toward the Glendale Galleria before midnight, some banging on one entrance and shouting to be let in. At the Third Street Promenade in Santa Monica, shoppers rushing into Urban Outfitters shattered a glass door. Mall traffic was a nightmare throughout Southern California.

Despite the chaos, early signs point to a blockbuster shopping day for merchants — with stores raking in even more than the record $11.4 billion for Black Friday they reported last year. More comprehensive numbers are expected Sunday.

"Overall it was a smash hit," said Britt Beemer, a retail expert at America's Research Group who has been tracking holiday sales nationally for more than three decades. "In all the years I have been out, I have never seen such crowds in my life."

Target, Sears and the Disney Store reported a surge in customers. Wal-Mart said it was the retail behemoth's best Black Friday sale ever. Mall operators saw long lines, and shoppers scooped up even some full-price items as well as bargains in stores and online.

The shopping frenzy cheered merchants and Wall Street, which enjoyed a big boost Friday.

There was no violence reported in Southern California, where last year at least 10 people were injured when a shopper used pepper spray to ward off rivals at a Porter Ranch Wal-Mart.

But protests erupted over working conditions at dozens of Wal-Marts nationwide, including one that led to the arrest of nine people blocking a street in Paramount. And two people were shot in what police said was a scuffle over a parking spot at a Wal-Mart in Tallahassee, Fla.

LAist has more on that, "Local Walmart Workers Stage Black Friday Walkout [VIDEO]."

Peter Suderman's Twitter Tutorial Shows How Walmart Helps Nation's Poor

It's really very straightforward. Walmart's low prices make more goods available to more people, especially people at the lower income quintile. I used to talk a lot about Walmart during my class discussions on the economy. One thing Suderman doesn't mention is that Walmart's economies of scale create dramatic ripple effects throughout the entire economy. There's a tremendous benefit from lower prices for families across the board, as the company's market-setting impact improves the well-being of individuals and families at all income levels. Basically, Walmart helps keep prices low economy-wide. Suppliers, wholesalers, shippers and other interdependent businesses must keep costs down to stay competitive, or Walmart shifts its purchasing and contracting relations to more efficient concerns. Inflation is reduced nationally. And national well-being increases. Left-wing attacks on Walmart are not designed to help workers, who will end up losing their higher wages to big labor bosses in any case, when they pony up their mandatory union dues. It's power the big bosses want, not social improvements for society's poor.

See Twitchy, "Reason magazine’s Peter Suderman destroys the Left’s irrational Walmart criticism."

9. Raise prices to pay for increased wages and you cut into the store’s huge low-price benefits for the poor. It’s regressive.
— Peter Suderman (@petersuderman) November 24, 2012

And at The Blaze, "Reason Senior Editor Dismantles the Left's Chief Anti-Walmart Talking Points."

Walter Williams: Free Market Morality

Via Astute Bloggers:

Corporate Optimism Fades

Actually, while consumers might be a little more optimistic, this stuff tends to accumulate. When you see earnings on your mutual funds and 401Ks collapsing, that can be pretty harsh. Folks turn bearish and they take it out on their political leaders. I think there's a lot of amorphous economic disenfranchisement out there, and that could be a November surprise on election day.

Either way, check the New York Times, "Companies Aren't as Optimistic as Consumers":

Consumers may finally be feeling more optimistic about the economy, but corporate America is not sharing the sentiment.

A host of market bellwethers reported disappointing results Tuesday and cut their outlook for future growth, sending stocks into a tailspin and highlighting the divide between companies and consumers.

It was Wall Street’s second big drop in the last three trading days, with household names like Xerox, 3M and DuPont leading the way down as the Dow Jones industrial average dropped more than 240 points. The Dow is now down 3.7 percent from its high for the year reached earlier this month.

The concerns among business leaders extend well beyond earnings — a Federal Reserve regional survey released Tuesday showed new signs of weakness in the domestic manufacturing sector, even as global growth slows.

Corporate executives also reiterated the danger posed to the economy if Washington cannot avert sharp tax increases and spending cuts in early January, the fiscal cliff that many economists say heightens the risk of recession. This uncertainty is compounded by the prospect of a new Fed chairman by early 2014.

The pessimism is all the more notable because after years of wariness, consumers are feeling more buoyant. Consumer confidence is at its highest point since before the financial crisis. The housing market is showing signs of life. And retail sales actually sped up in the third quarter, fueling the hopes of retailers for a robust holiday season.

“Normally, you think of consumer confidence as more important,” said Ethan Harris, chief United States economist at Bank of America Merrill Lynch. “But the business sector is a quarter or two ahead this time.”

One reason for the disparity is that businesses are much more focused on conditions abroad than consumers in the United States. With growth in China slowing and parts of Europe in recession, cooling international sales are weighing on corporate earnings. The prospect of slowing global demand for oil generated a sell-off Tuesday, as crude fell 2.2 percent, to $86.67, its lowest level since July.

Indeed, the sectors that rely more on international sales have been among those hit the hardest. Xerox, 3M and United Technologies each lowered their outlook.

While the fiscal cliff looms large in boardrooms, consumers are less concerned about whether Congress will extend Bush-era tax cuts set to expire in January and whether it will come up with a deal to cut the deficit and avert automatic spending cuts.

“Clearly, there is something going on, with consumers going one way and businesses going the other,” said Paul Ashworth, chief United States economist at Capital Economics.

Looking ahead, optimists say the new willingness of consumers to spend will ultimately bolster corporate results, but there is a lingering fear that the struggles of American companies may be pointing the way.

“The heads of the large corporations have their fingers on a lot of information,” said Bernard F. McGinn, president of McGinn Investment Management. “The decisions they make are of a scale many times what the consumer does.”

Steve Wynn Slams Obama

I saw Wynn on Piers Morgan's a month or so ago, and he was hard on Obama then, but he's really pissed off here. Watch it all the way through. He's brutally unloading on President Clusterf-k:

Unexpectedly! Gas Prices Rise Overnight to New Record

At the Los Angeles Times, "Gas prices in California rise to another new record."

And Bob Owens gets apocalyptic:

The polimedia seems to be vastly underestimating (or at least, under reporting) that at least some of the conditions for widespread civic unrest are coming to a head in California. When people miss just a few meals, society quickly falls apart. How much more stress can the overburdened system handle before falling apart? I’d say that I hope we don’t have to find out, but with California’s unavoidable bankruptcy and insurmountable bureaucracy, it is more likely that we’re really just facing a matter of “when.”

The New York Times is even on this story, "Gas Prices Rise Again Overnight in California" (via Memeorandum).

BONUS: At American Thinker, "Obama's gasoline prices; a highly regressive tax."

IMAGE CREDIT: Director Blue, "Yes, you can get $1.84 gallon gas in Cincinnati! Just ask!"