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.

Too Much Wishful Thinking on Middle-Class Tax Rates

From Greg Mankiw, at the New York Times, "Wishful Thinking and Middle-Class Taxes":

IN the continuing fiscal negotiations between President Obama and House Republicans, both sides have, from the very beginning, agreed on one point: Taxes on the middle class must not rise. But maybe it’s time to reconsider this premise. An unwavering commitment to keep middle-class taxes low could be one reason the political process has become so deeply dysfunctional.

Let’s start with the problem: the budget deficit. Under current policy, the federal government is spending vastly more than it is collecting in tax revenue. And that will be true for the next several decades, thanks largely to the growth in entitlement spending that will occur automatically as the population ages and health care costs increase. As a result, the ratio of government debt to the nation’s gross domestic product is projected to rise, substantially and without an end in sight.

That can happen for a while, or even a long while, but not forever. At some point, investors at home and abroad will start questioning our ability to service our debts without creating steep inflation. It’s hard to say precisely when this shift in investor sentiment will occur, and even whether it will strike in this president’s term or the next, but when it does, it won’t be pretty. The United States will find itself at the brink of an unprecedented financial crisis.

Republicans and Democrats agree on the nature of the problem, but they embrace very different solutions. My fear is that both sides are engaged in an excess of wishful thinking, with a dash of mendacity.

If Republicans had their way, they would focus the entire solution on the spending side. They say that reform of the entitlement programs can reduce their cost. The so-called premium-support plan for Medicare, from Paul D. Ryan, the 2012 Republican vice-presidential candidate, would let older Americans use their health care dollars to buy insurance from competing private plans. (Interestingly, it’s similar to the system envisioned for the nonelderly by President Obama’s Affordable Care Act.) The hope is that competition and choice would keep health care costs down without sacrificing quality.

The premium-support model may well be better than the current Medicare system, but its supporters oversell what it would be likely to accomplish. The primary driver of increasing health care costs over time is new technology, which extends and improves the quality of life, but often at high cost. Unless the pace or nature of medical innovation changes, this trend is likely to continue, regardless of structural reforms we enact for Medicare.

Democrats, meanwhile, want to preserve the social safety net pretty much as is. They balk at any attempt to reduce this spending, including even modest changes like altering the price index used to calculate Social Security benefits. They focus their attention on raising taxes on the most financially successful Americans, contending that the rich are not paying their “fair share.”

Fairness, like beauty, is in the eye of the beholder. Unfortunately, people’s judgment is often based on anecdotes that distort rather than illuminate. The story of the undertaxed Warren Buffett and his overtaxed secretary looms larger in the public’s mind than it should.

Here are some facts, so you can judge for yourself....

Even if President Obama wins all the tax increases on the rich that he is asking for, the long-term fiscal picture will still look grim. Perhaps we can stabilize the situation for a few years just by taxing the rich, but as greater numbers of baby boomers retire and start collecting Social Security and Medicare, more will need to be done.

Continue reading (via Memeorandum).

RELATED: I'm for shrinking government, so this is the bottom line for me, at The Lonely Conservative, "People Should Pay For the Government They Voted For." Raise taxes. Go over the cliff.  I guarantee you that Obama won't get off cost-free. The real cost of the election will start biting people in the ass.

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.

Fiscal Cliff Talks Down to the Wire

At the clip, Charles Krauthammer praises Obama for his "ruthless" partisanship.

And at the Wall Street Journal, "Both Sides to Meet at White House; Any Deal Likely to Be Limited":

Congress and the White House took small steps toward breaking the budget impasse Thursday, but Democrats and Republicans grew increasingly fearful they won't be able to avert the tax increases and spending cuts known as the fiscal cliff, a prospect that is unnerving consumers and investors.

President Barack Obama invited congressional leaders to the White House on Friday afternoon for a last-ditch effort to broker a deal, as the Senate returned to Washington on Thursday. House GOP leaders said in a Thursday conference call with Republicans, who are growing nervous about their party being blamed for the deadlock, that the House will reconvene Sunday evening.

It is still possible the two sides can reach a deal, especially with the leaders meeting Friday. Any resolution would be a scaled-back version of the package Mr. Obama and congressional leaders had anticipated passing after the November election. The White House is pressing for the Senate to extend current tax rates for income up to $250,000, extend unemployment benefits, keep the alternative minimum tax from hitting millions of additional taxpayers and delay spending cuts set to take effect in January.

The 11th-hour strategy carries enormous risk because it leaves no margin for error in Congress's balky legislative machinery. Senate Majority Leader Harry Reid (D., Nev.) said the prospects for passage of a bill before the last day of the year are fading rapidly. "I have to be very honest," he said. "I don't know time-wise how it can happen now."

Anxiety about Washington's ability to resolve its budget battles is roiling the economy. Conference Board figures showed that consumer confidence fell in December to its lowest level since August, driven by a pessimistic outlook for economic activity next year.

Stocks have swung on the latest news from Washington. The Dow Jones Industrial Average fell sharply on Mr. Reid's pessimistic comments before recouping most of a 151-point drop on news the House would reconvene this weekend.

At best, leaders are looking at a narrow bill that could be passed at the last minute. At the meeting Friday, Mr. Obama will outline the elements he thinks should be in a deal and could get majority support in both chambers of Congress, according to a person familiar with the matter. He won't put forward a specific bill or legislative language, the person added.

Continue reading.

And at Telegraph UK, "Barack Obama will meet congressional leaders today at the White House for last-minute talks on a "fiscal cliff" deal to avoid automatic tax increases and broad spending cuts that threaten the US economy's recovery."

PREVIOUSLY: "America's Crisis of Big Government Cronyism and Corruption."

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!

Personal Computers On the Way Out

If the PC isn't on the way out economy-wide, it's certainly on the way out in my household. Not only have we not had a PC for a few years, we're now almost all on Apple mobile devices. I bought my wife an iPad for Christmas. Both my sons are fully on Apple. I got an iPhone 5 a couple months back and I'll be purchasing an Apple laptop sometime early next year. The part, at the clip, about taking your computing devices with you really says it all. I need a laptop to blog, but other than that I can do just whatever I want on handheld devices. The changes in technology are endlessly fascinating. I'm just wondering when we'll get some real robust economic growth amid all the innovation, like we had during the 1990s' Internet boom.

Thanks Democrats: Sluggish Economic Growth Locked-In for 2013

At IBD, "Economy 2013: Mediocre Growth Will Be the New Good":

Next year may be when Americans stop waiting for faster economic growth to make everything better again and finally learn to accept the current modest pace as good enough now and good enough later.

Even if lawmakers reach a deal to avoid the fiscal cliff's full impact, tax rates will still go up for many Americans, and government spending will go down.

Incomes, which have seen little growth during the recovery, are unlikely to start shooting higher. Aging consumers haven't regained their lost net worth and aren't ready to load up on new debt.

"It's a very different economy than what we've seen in the last 20 to 30 years," said Steve Blitz, chief economist at ITG Investment Research.

Gross domestic product has expanded at an average rate of just over 2% a year since the recession ended, and many economists expect more of the same in 2013.

That assumes a fiscal cliff deal. But the chances of a pact before year-end are now looking increasingly bleak, and a prolonged standoff could deal another blow to the fragile economy. The U.S. could fall back into recession, the Congressional Budget Office has said.

Even without a "cliff" shock, the National Association for Business Economics, the Organization for Economic Cooperation and Development and the International Monetary Fund all see 2013 growth at or just above 2%.

ITG's Blitz also thinks the U.S. will expand by about 2%, with some positive momentum in housing but not much improvement in consumer spending.

"What the economy is not going to do is accelerate toward the trend path where we were pre-recession," he said. "We're not going to make up that lost ground."

More at that top link.

While I think both parties suck, it's definitely the Democrats who're by design seeking to hold the economy back by punishing wealthy high-achievers in the name of social justice. Even far-left hack Jamelle Bouie admits it, "Why Democrats insist on upper-income tax hikes."

Newsweek's Last Print Issue

Via Twitter:

And from Andrew Romano, at Newsweek (Online), "‘The First Rough Draft of History’."

Newsweek was my favorite political magazine when I was in college. I used to get both Time and Newsweek in the mail, but Newsweek was always more hip --- and funnier. I rarely read it online nowadays but I'm not pleased to see it going out of print. All sides should be represented in the marketplace, but, alas, the marketplace has spoken in this case. The online version might not last that much longer. But we'll see.

Countdown to the Fiscal Cliff

I had John Hawkins' excellent post at the sidebar blog item finder, but I keep thinking about his comments as the fiscal cliff debate continues. This should be up on the front page: "5 Ways The GOP’s Poor Political Decision Making Helped Create This Fiscal Cliff Mess + Why I Would Have Voted For Boehner’s Plan B."

Bottom line for me: the GOP's all messed up and it's going to take some structural reforms at the organizational level to start turning things around. John's right: the Democrats won the public relations battle on higher taxes for the wealthy. Obama sees raising taxes as his mandate. And he correctly perceives the weakness of the Republican position and the obvious fractures within the GOP conference on the Hill.

More from Karen Tumulty, at the Washington Post, "Tax fight sends GOP into chaos."

And at the New York Times, "News Analysis: Still Bitter About Election, Republican Opposition Unwilling to Compromise with President" (via Memeorandum).

Stimulus Forecasts Show Obama Can't Blame GOP for Poor Economy

At IBD, "Obama's Attacks On GOP Tax Policy Blunted By Own Data":

President Obama continues to blame the soft economy and record red ink on Republican policies, including "tax cuts for the wealthiest Americans."

But three years ago he seemed convinced the economy had made a clean break from those old policies, and would soon roar back on the strength of his own policies. The proof is in his economic projections.

In his 2010 budget, Obama predicted his American Recovery and Reinvestment Act would "jump-start our economy" and "create new jobs" and "many years of economic growth."

Stronger economic activity, he promised, would bring in more government revenues and "cut the deficit in half by the end of my first term in office," putting "our nation on sound fiscal footing."

"The time has come to usher in a new era — a new era of responsibility in which we act not only to save and create new jobs, but also to lay a new foundation of growth," the president said.

Didn't Deliver

His recovery plan included more than $1 trillion in new government spending. A Democrat-controlled Congress passed it without a single Republican vote.

Based on the new economic program, the White House forecast real GDP in 2012 would grow at a robust 4.6% clip, cutting the unemployment rate to 6.0%. It also saw the budget deficit dropping to 3.5% of the economy.

The projections didn't come even close to panning out. Real GDP growth has stagnated at 2%, while unemployment hovers near 8%. Far from being halved, the deficit had soared to 8.5% of GDP.

As the jobless rate soared to 10% — well beyond the promised 8% high point — the White House had to adjust its assumptions and timeline. In its 2012 budget, however, it still projected 4.0% economic growth.

Despite White House spin, it became clear the president's economic plan had failed to deliver on its promised stimulus.

They all knew this. Obama, David Axelrod, Stepanie Cutter --- they all knew all of this.

Which is why they lied 24/7 about the problems facing the country and launched the most unprincipled demagogic smears against private property and wealth accumulation in modern history. And it worked! I doubt four more years of economic stagnation will help the party maintain its general election majority, but then again, I was wrong about 2012, so who knows? Maybe another paradigm of lies will lift these criminal authoritarians to yet another presidential win in 2016. Democracy doesn't just collapse in one big instant, it withers away in the slow death of a thousand cuts. It's withering now under the Democrats, but all is not lost. The republic will survive when enough people who've been butt-reamed and had the wool pulled over their eyes wake up and scream, "I'm not going to take it anymore!"

IBD/TIPP Poll: Fiscal Cliff Sinks Dems' Hopes After Obama Re-Election

From Investor's Business Daily, "IBD/TIPP Poll: Fiscal Cliff Deflates Democratic Hope":

Democrats stopped basking in the afterglow of President Barack Obama's re-election victory and abruptly lowered their outlook on the economy this month, as fears of the "fiscal cliff" dominate year-end headlines, according to the latest IBD/TIPP poll released Tuesday.

The Economic Optimism Index dropped to a year low of 45.1 in December from 48.6 in November, the second straight decline, with sentiment among Democrats falling by 8.2 points to 65.6.

Republican economic sentiment, which hit a record low right after the Nov. 6 vote, dipped 1.1 points to a new low of 23.7 in December. Readings below 50 indicate pessimism.

"Consumer confidence is driven largely by party affiliation," said Raghavan Mayur, president of TechnoMetrica Market Intelli gence, which conducted the poll.

Given the wide partisan disparity, a truer indicator could be how independents feel, he added. They turned slightly gloomier too, slipping to 42.3 from 44.

An earlier run-up in sentiment was first led by Democrats in September, when the successful presidential convention boosted re-election prospects and brightened their views on the economy. The index advanced further in October as Mitt Romney's strong debate performance lifted Republican sentiment.

But the election brought the index back down. A separate survey Tuesday also found it devastated hopes among small-business owners worried about regulation and ObamaCare costs.

The National Federation of Independent Business' sentiment gauge dropped 5.6 points to 87.5 last month, the lowest since March 2010. The share of small businesses positive about the economic outlook fell from a net 2% to a deeply pessimistic -35%.

America Will Find Out How a Termed Out Socialist Will Govern

Cartoon via the Looking Spoon.

And Daniel Henninger suggest we won't be waiting long, "Obama's Ruinous Course":

A wise judge once wrote in dissent that the Constitution is not a suicide pact. Let us now extend that wisdom to presidential elections.

Barack Obama says his election victory is a mandate to pursue the policy course he's insisting on in negotiations with Republicans on the fiscal cliff. He wants a tax increase of $1.6 trillion, $50 billion of new and immediate stimulus spending and the end of congressional approval to raise the ceiling on U.S. debt—the debt that a ratings agency downgraded in 2011.

The campaign stump speech in which Mr. Obama demanded that Congress cede him control over the debt ceiling slips my mind. But we all recall his repeated cries for increasing taxes on "the wealthiest" ($200,000 individual/$250,000 joint), so arguably he has a claim to that. Consequences do come with the democratic habit of holding elections.

But if that is true, then Republicans are justified in citing the consequences of the message of the midterm election held a mere two years ago. In 2010, the Republicans regained control of the House of Representatives. Less noted but as important in measuring the nation's desires, that election gave the GOP control of the largest number of state legislatures it had held since 1928. A similar surge occurred for Republican governors.

Last time I looked, the progressive movement still hadn't turned Washington, D.C., into the only political jurisdiction of consequence in the United States. The message of the 2010 election, for Republicans anyway, was unambiguous: Slow down the runaway public-spending train, the spending train that caused the nation's voters to torch and punish Republicans in the 2006 midterms.

On the available evidence, a Republican who forgets those recent elections is headed for retirement. So naturally Barack Obama wants John Boehner and the Republicans in control of the House to forget those elections.

Bear in mind as we spend the holidays on this precipice, that the "fiscal cliff" wasn't born yesterday. It crawled out of its crypt in late 2011, after the Republican leadership and Mr. Obama—the deficit-reduction "super committee"—failed to negotiate essentially the same deal they are failing to get done now.

The inability of this Congress and this president to compromise on anything, now or at any time in the past four years, is itself a problem worthy of some thought.

Here's one thought: The main reason there isn't, and may never be, a solution on the fiscal cliff is that Barack Obama doesn't know how to do a political compromise. Where in his career did Barack Obama ever learn the art of the political deal? Nowhere.

Well, there you go. It's going to a long quadrennial.

More at that top link.

Progressives suck, especially our Dear Progressive Leader Barack Hussein. All hail!

Dems Ready to Push Americans Over Fiscal Cliff

At Business Week, "Geithner Says No Fiscal Deal Without Higher Tax Rates."

U.S. Treasury Secretary Timothy F. Geithner said the Obama administration “absolutely” is willing to go over the fiscal cliff if Republicans don’t agree to raise tax rates on the highest-income earners.

“There’s no prospect to an agreement that doesn’t involve those rates going up on the top 2 percent of the wealthiest,” Geithner said in an interview on CNBC today.

Dick.

RELATED: At Hot Air, "Tapper to Carney: Back to “hostage” again, eh, champ?", and at Twitchy, "New tone: DCCC launches site branding GOP ‘hostage takers’."

Democrat dicks.

The Blue-State Suicide Pact

From Joel Kotkin, at New Geography:

With their enthusiastic backing of President Obama and the Democratic Party on Election Day, the bluest parts of America may have embraced a program utterly at odds with their economic self-interest. The almost uniform support of blue states’ congressional representatives for the administration’s campaign for tax “fairness” represents a kind of  bizarre economic suicide pact.

Any move to raise taxes on the rich — defined as households making over $250,000 annually — strikes directly at the economies of these states, which depend heavily on the earnings of high-income professionals, entrepreneurs and technical workers. In fact, when you examine which states, and metropolitan areas, have the highest concentrations of such people, it turns out they are overwhelmingly located in the bluest states and regions.

Ironically the new taxes will have relatively little effect on the detested Romney uber-class, who derive most of their income from capital gains,   taxed at a much lower rate. They also have access to all manner of offshore dodges. Nor will it have much impact on Silicon Valley millionaires and billionaires, or the Hollywood moguls and urban land speculators who constitute the Democratic Party’s “good rich,” and enjoy many of the same privileges as their wealthy conservative counterparts.

The people whose wallets will be drained in the new war on “the rich” are high-earning, but hardly plutocratic professionals like engineers, doctors, lawyers, small business owners and the like. Once seen as the bastion of the middle class, and exemplars of upward mobility, these people are emerging as the modern day “kulaks,” the affluent peasants ruthlessly targeted by Stalin in the early 1930s.

William Jacobson's getting a kick out of the kulak analogy: "Go kulak — more of nothing is nothing." (And be sure to follow the links there.)

But back to Kotkin's piece:

What would a big tax increase on the “rich” mean to the poor and working classes in these areas [big metro areas that supported Obama]? To be sure, they may gain via taxpayer-funded transfer payments, but it’s doubtful that higher taxes will make their prospects for escaping poverty much brighter. For the most part, the economies of the key blue regions are very dependent on the earnings of the mass affluent class, and their spending is critical to overall growth. Singling out the affluent may also reduce the discretionary spending that drives employment in the personal services sector, retail and in such key fields as construction.

This prospect is troubling since many of these areas are already among the most unequal in America. In the expensive blue areas, the lower-income middle class population that would benefit from the Administration’s plan of keeping the Bush rates for them is proportionally smaller, although the numbers of the poor, who already pay little or nothing in income taxes, generally greater. Indeed, according to a recent Census analysis, the two places with the highest proportions of poor people are Washington, D.C., and California. By far the highest level of inequality among the country’s 25 most populous counties is in Manhattan.

Finally we have to consider the impact of the new tax rates on the fiscal health of these states. Four of the five states in the poorest shape fiscally, according to a recent survey by 24/7 Wall Street, all have congressional delegations dominated by Democrats — California, New Jersey, Rhode Island and Illinois (the one red state is Arizona). Slower economic growth brought about by higher taxes — compounded by high state taxes — is unlikely to make their situation any better.

So what can we expect to happen if the fiscal cliff appears, or if the President and his party get their taxes on the rich? One can expect a proportionally greater impact on citizens and the budgets of the already expensive, high-tax states, where the new kulak class is concentrated. It may also spark a greater migration of people and companies to less expensive, lower-tax areas...

Progressive economics is not smart.

Seriously. We're talking retardo-maximo territory here (shaking head in pitiful yet resigned astonishment).

GOP Rejects Obama Opening Bid in Fiscal Cliff Negotiations

At the clip is Donald Marron of the Urban-Brookings Tax Policy Center, a center-left think tank. Taxes are going to hit just about everyone if we go over the cliff, and hit hard.

Meanwhile, the White House's opening bid is a staggering example of progressive extremism and contempt for commonsense budget discipline. Especially egregious is the call for increasing the federal government's debt limit. The Los Angeles Times reports, "Boehner: 'Fiscal cliff' talks hit 'stalemate'":

Republicans had harsh words for the offer Obama’s Treasury secretary presented this week to avert the year-end fiscal crisis of automatic tax hikes and spending cuts. Obama proposed generating new revenue by allowing existing tax rates on to expire for those earning above $250,000 for couples, or $200,000 for single households. The highest rate would revert from 35% to 39.6%. Obama would also end the historically low 15% tax rate on capital gains and dividends for these upper-income households, taxing dividends at ordinary income tax rates and increasing the capital gains rate to 20%.

“Laughable” and “absolutely insulting” were among the comments coming from Republicans over the White House offer, which was essentially a reprise of the president’s earlier budget proposal to Congress. GOP lawmakers also objected to Obama’s calls to renew stimulus spending to spur the economy, aid homeowners in refinancing mortgages and extend long-term unemployment benefits.

Republicans want Obama to put deeper spending cuts on the table in exchange for their offer to produce new revenue by capping deductions and lowering rates to generate economic growth – a proposal that experts say does not add up unless you extract more money from middle-class households.

“Increasing tax rates draws money away from our economy that needs to be invested in our economy to put people back to work,” Boehner said. “It’s the wrong approach.”

As Obama seizes the bully-pulpit in a very high-profile public relations campaign, Republicans have both criticized and copied the approach – embarking on their own counter-campaign on Twitter and traditional media, while complaining the president should spend more time negotiating in Washington.

Republicans took particular aim at Obama’s visit Friday to a small business, as they argued that companies would be especially hurt by the tax hikes because many owners of small businesses file individual income tax returns.

Studies have shown nearly 3% of the small businesses earn enough income to be hit by the higher tax, about 900,000 businesses.

No talks are scheduled as the impasse deepens. If no agreement is reached by year's end, the combination of higher taxes and deep spending cuts would rattle the fragile economy. Tax rates are set to automatically rise on Jan. 1 – resulting in a $2,200 tax hike on ordinary Americans; at the same time, previously agreed to spending cuts would begin Jan. 2, slicing through the federal budget.

Doing nothing could tip the economy into another recession, economists have warned, especially as Wall Street is eager for a deal that would fundamentally reform tax and spending to lower the nation’s annual deficits.

And see also Charles Krauthammer, "Cliff-jumping with Barack":

Obama is claiming an electoral mandate to raise taxes on the top 2 percent. Perhaps, but remember those incessant campaign ads promising a return to the economic nirvana of the Clinton years? Well, George W. Bush cut rates across the board, not just for the top 2 percent. Going back to the Clinton rates means middle-class tax hikes that yield four times the revenue that you get from just the rich.

So give Obama the full Clinton. Let him live with that. And with what also lies on the other side of the cliff: 28 million Americans newly subject to the ruinous alternative minimum tax.

Republicans must stop acting like supplicants. If Obama so loves those Clinton rates, Republicans should say: Then go over the cliff and have them all.

Hear, hear. Fuck Obama. I don't believe at all that he has the upper hand in negotiations. His political capital is limited. He's a lame duck now. It's four and out after January 20th, unless he's able to declare himself president-for-life, a possibility with a snowball's chance for even this authoritarian of an administration. Republican should hang a rejection of the deal like a Christmas wreath around the president's neck. Send him home for the holidays with those tax increases. Everyone will get plenty of the blame, but bet your bottom dollar that the public won't buy the argument that it's all the GOP's fault. This White House said that it wouldn't raise taxes on the middle class, a pledge that's already being broken with the ObamaCare monstrosity. Another shot of tax increases will only wear the patience of a public that decided to give the president more time to fix the economy. Instead they'll find the he fixed their finances for the worse.

I'll have more. Meanwhile, there's lots more at Memeorandum.

Costco to Pay Out Current Year Dividends to Avoid Obama Tax Cliff

Sometimes plain old economics trumps any other form of behavior, such as benevolence or political loyalty. And in the case of Costco's corporate board, behold how onerous tax policies impose massive constraints on otherwise publicly spirited entities and individuals.

A really laugh, at the Wall Street Journal, "Costco's Dividend Tax Epiphany":

When President Obama needed a business executive to come to his campaign defense, Jim Sinegal was there. The Costco co-founder, director and former CEO even made a prime-time speech at the Democratic Party convention in Charlotte. So what a surprise this week to see that Mr. Sinegal and the rest of the Costco board voted to give themselves a special dividend to avoid Mr. Obama's looming tax increase. Is this what the President means by "tax fairness"?

Specifically, the giant retailer announced Wednesday that the company will pay a special dividend of $7 a share this month. That's a $3 billion Christmas gift for shareholders that will let them be taxed at the current dividend rate of 15%, rather than next year's rate of up to 43.4%—an increase to 39.6% as the Bush-era rates expire plus another 3.8% from the new ObamaCare surcharge.

More striking is that Costco also announced that it will borrow $3.5 billion to finance the special payout. Dividends are typically paid out of earnings, either current or accumulated. But so eager are the Costco executives to get out ahead of the tax man that they're taking on debt to do so.

Shareholders were happy as they bid up shares by more than 5% in two days. But the rating agencies were less thrilled, as Fitch downgraded Costco's credit to A+ from AA-. Standard & Poor's had been watching the company for a potential upgrade but pulled the watch on the borrowing news.

We think companies can do what they want with their cash, but it's certainly rare to see a public corporation weaken its balance sheet not for investment in the future but to make a one-time equity payout. It's a good illustration of the way that Federal Reserve Chairman Ben Bernanke's near-zero interest rates are combining with federal tax policy to distort business decisions.

One of the biggest dividend winners will be none other than Mr. Sinegal, who owns about two million shares, while his wife owns another 84,669. At $7 a share, the former CEO will take home roughly $14 million. At a 15% tax rate he'll get to keep nearly $12 million of that windfall, while at next year's rate of 43.4% he'd take home only about $8 million. That's a lot of extra cannoli.

This isn't exactly the tone of, er, shared sacrifice that Mr. Sinegal struck on stage in Charlotte. He described Mr. Obama as "a President making an economy built to last," adding that "for companies like Costco to invest, grow, hire and flourish, the conditions have to be right. That requires something from all of us." But apparently $4 million less from Mr. Sinegal.

By the way, the Costco board also includes at least two other prominent tub-thumpers for higher taxes— William Gates Sr. and Charles Munger. Mr. Gates, the father of Microsoft's Bill Gates, has campaigned against repealing the death tax and led the fight to impose an income tax via referendum in Washington state in 2010. It lost. Mr. Munger is Warren Buffett's longtime Sancho Panza at Berkshire Hathaway BRKB +0.13% and has spoken approvingly of a value-added tax that would stick it to the middle class.

Costco's chief financial officer, Richard Galanti, confirms that every member of the board is also a shareholder. Based on the most recent publicly available data, they own more than 4.1 million shares and more than 1.3 million options to purchase additional shares. At $7 a share, the dividend will distribute roughly $29 million to the board, including Mr. Sinegal's $14 million—at a collective tax saving of about $8 million. Even more cannoli.

These idiots who pound the table for higher taxes are the first to cash out when the bill's about to come due for the rest of us. Gee thanks Baracky!

And it's worth linking Greg Makiw's recent piece on Buffett, "A Master of Tax Avoidance."

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]."

Walmart Black Friday Shopping

At JWF, "Bloody Friday: Deranged Shoppers Battle Over Cell Phones at WalMart."

(Also on YouTube, "Walmart Black Friday Fighting Over Phones During 2012.")

Obama Copies California, While State's Residents Flee to Texas

An absolutely amazing development, but no surprise givien the long-standing stagnation of this once "Golden State." At IBD, "Obama Policies Copy Moribund California, Not Texas":

Anyone who thinks that President Obama's economic policies will spur strong growth should consider U-Haul rates between California and Texas.

Renting a 20-foot truck one-way from San Francisco to San Antonio, for example, will cost $1,693. But the U-Haul tab to go in the opposite direction is just $983.

To University of Michigan economist Mark Perry, who has tracked this "U-Haul Index," the difference in these rental rates is the result of straightforward supply and demand.

Put simply, far more people want to leave California for Texas than vice versa. Why? Because California's economy is moribund while Texas' is thriving.

"The American people and businesses are voting with their feet and their one-way truck rentals to escape California and its forced unionism, high taxes, and high unemployment rate for a better life in low-tax, business-friendly, right-to-work states like Texas," noted Perry, who is also a scholar at the American Enterprise Institute.

California Nation

The problem is that Obama's economic policies are pushing the country to be more like the California people are leaving and less like the Texas they're flocking to.

"Every dream program that the administration embraces — cap and trade, massive taxes on the rich, high-speed rail — is either in place or on the drawing boards" in California, notes Joel Kotkin, executive editor of NewGeography.

Like President Obama, California's Gov. Jerry Brown pushed for a substantial new tax on the "rich" that raises the top rate to 13.3%, a hike voters approved in November. Even before these taxes kick in, California was the fourth most heavily taxed state, according to a ranking by the Tax Foundation.

Also like Obama, the state is regulation happy. The Mercatus Center at George Mason University ranks California as one of the four worst states in terms of regulations. The state also imposes one of the heaviest tax burdens on businesses.

As a result, California consistently ranks at or near the bottom for business friendliness.

And like Obama — who has pushed federal spending up to historic highs for the past four years — per-capita spending in California has climbed 42% from 2000 to 2010, even after adjusting for inflation. The state is now one of the biggest spenders in the country.

The contrast in economic policies between California and Texas — which otherwise share many things in common, since both are big-population border states with lots of immigrants — could not be more striking.

Continue reading.