Friday, January 04, 2013
Grading the Fiscal Cliff Deal: Terrible, but Could Be Worse
The faux drama in Washington is finally over. The misfits in Washington reached a deal on the fiscal cliff.
Republicans and Democrats managed to come together and decide that they should get a bigger slice of what the American people earn. Gee, what a surprise.
First, the good news:
Oh, wait, there isn’t any.
Now for the bad news.
The top tax rate will increase to 39.6 percent for entrepreneurs, investors, small business owners, and other “rich” taxpayers making more than $400,000 ($450,000 for married couples). This is Obama’s big victory. He gets his class-warfare trophy.
The double tax on dividends and capital gains climbs from 15 percent to 20 percent (23.8 percent if you include the Obamacare tax on investment income).
The death tax rate is boosted from 35 percent to 40 percent (which doesn’t sound like a big step in the wrong direction until you remember it was 0 percent in 2010).
The alternative minimum tax will still exist, though it will be “patched” to protect as many as 30 million households from being swept into this surreal parallel tax system that requires people to use a second method of calculating their taxes – with the government getting the greatest possible amount.
Unemployment benefits are extended, ensnaring more Americans in joblessness.
Medicare spending is increased as part of a “doc fix” to increase reimbursement payments for providers.
But let’s not delude ourselves. This deal is not good for the economy. It doesn’t do anything to cap the burden of government spending. It doesn’t reform entitlement programs.
And we may even lose the sequester, the provision that was included in the 2011 debt limit that would have slightly reduced the growth of government over the next 10 years.
What a dismal start to 2013.
It’s a fair bet that every American who’s travelled outside the United States has heard people complaining about their societies becoming “Americanized.” By this, they usually mean the proliferation of things such as American television and fast-food chains (though that rarely stops them from watching Hollywood films or eating McDonalds).
More recently, however, millions of Americans have begun wondering if our own country is becoming “Europeanized.”
In one sense, to say that America is becoming like Europe seems odd. After all, when it comes to its dominant political ideas, religious culture, institutions and history, America is obviously Europe’s child.
That, however, is not what Europeanization means today. Instead it’s about the spread throughout America of economic expectations and arrangements directly at odds with our republic’s founding.
These lead to the prioritizing of economic security over economic liberty; to the state annually consuming close to 50% of GDP; to the ultimate economic resource (i.e., people) aging and declining in numbers; to extensive regulation becoming the norm; and perhaps above all, to a situation in which economic incentives lie not in work, economic creativity and risk-taking, but rather in access to political power.
Unfortunately there’s a great deal of evidence suggesting America is slouching down the path to Western Europe. In practical terms, that means social-democratic economic policies: the same policies that have turned many Western European nations into a byword for persistently high unemployment, rigid labor markets, low-to-zero economic growth, out-of-control debt and welfare states, absurdly high tax levels, growing numbers of well-paid government workers, a near-obsession with economic equality at any cost and, above all, a stubborn refusal to accept that things simply can’t go on like this.
It’s very hard to deny similar trends are becoming part of America’s economic landscape. States like California are already there — just ask the thousands of Californians and businesses who have fled the land of Nancy Pelosi.
Europeanization is also reflected in the refusal of so many Americans to take our nation’s debt crisis seriously. Likewise, virtually every index of economic freedom and competitiveness shows that, like most Western European nations, America’s position vis-à-vis other countries is in decline.
Between January 2008 and January 2011, for example, there was a marked growth in the amount of regulation in America — the pace being almost 40% more than the annual rate of increase between 1992 and 2008. Similarly, between 2008 and 2011 the number of people working in federal government regulatory agencies rose by 16% — a total of more than 276,000 people — at a time when private-sector employment was falling.
It’s no wonder the Nobel economist Robert E. Lucas asked in his 2011 Milliman Lecture at the University of Washington whether America was now “imitating European policies on labor markets, welfare and taxes.”
Such trends are deeply troubling. But here’s the good news. First, there remain many ways in which America has not succumbed to eurosclerosis. Risk-taking and entrepreneurship-levels remain, for example, much higher than in Europe. America’s labor markets also remain more flexible than those of Europe (despite American unions’ best efforts to the contrary).
Second, the problems of nations like Greece, Italy, Spain, Britain and France are functioning as a type of early-warning system. They’re enough of a “canary in the coal mine” to help us make the right decisions and get back to the principles that made the United States an economic superpower.
And this is the choice which increasingly faces America. We can either continue our long march towards a form of social democracy presided over by an all-pervasive European-like political class and associated insider-groups; or, we can embrace a dynamic market economy that takes liberty seriously and understands that government intervention in the economy must and can be limited.
Of course making such a decision isn’t simple. It involves trade-offs, the prioritization of different values, and fundamental disagreements about the role of government. And these discussions go beyond economics. They are arguments about what type of economic culture we want America to embrace and reflect to the millions throughout the world for whom the United States remains a lodestar for freedom.
But make no mistake, time is running out for America. We don’t have to become Europe. Yet the deeper the debt, the bigger the entitlements, the greater the regulations, and the more Americans look to government for their economic salvation, the harder it becomes for America to turn back from the road to permanent economic decline.
A great European and honorary American citizen Winston Churchill once said: “You can always count on Americans to do the right thing — after they’ve tried everything else.” I hope and pray he’s still right.
A Bogus Example of Controlling Inflation with Price Controls
As the U.S. government prepared for and then engaged fully in World War II, it made increasingly stringent efforts to control inflation by imposing price controls. Late in 1942, these controls were strengthened substantially, and from early 1943 through mid-1946, when the controls were allowed to lapse, the consumer price index rose very little. These data have often been trotted out to prove that the government can successfully control inflation if only it makes the laws severe enough and the monitoring agency sufficiently large and powerful.
In reality, inflation was not controlled; only the legally revealed prices were controlled. This experience does not require rocket science to understand: if the government makes it illegal and punishable to raise legal prices (or to raise them by more than a stipulated small amount), then sellers will not set legal prices that violate the restrictions.
But legal prices need not be, and during World War II certainly were not, the same as actual prices. Sellers and buyers used a variety of subterfuges to make transactions in violation of the government’s price controls. Sellers might reduce the product’s quality, as many did at the time; require the buyer to wait longer for an order to be filled; require the buyer to purchase unwanted goods in order to purchase wanted ones; require the buyer to pay for bogus goods, as when tenants were required to pay the landlord a hefty sum as “key money,” ostensibly to compensate him for keeping a spare key in case the tenant lost his key; require the buyer to forgo services normally associated with the goods, such as routine maintenance of rented apartments; or require gifts or other ostensible gratuities not ordinarily given to a seller.
Sellers might also simply disregard the posted prices and refuse to sell to anyone except at higher (unlisted and unreported) prices. The methods of evasion were legion.
Milton Friedman and Anna Schwartz and other economists who have made corrections for the understatement of the price level during the war years have shown that even partial corrections are sufficient to establish that the government’s price controls were far from the success claimed at the time and often gullibly swallowed later by economists and historians. (For sources and more detailed discussion, see pp. 89-93 of my book Depression, War, and Cold War.)
Economists are trained in theory, statistics, modeling, and other skills. Historians are trained in the careful scrutiny and interpretation of historical sources. Neither economists nor historians, unfortunately, are trained to use common sense in their work. Postwar proponents of the reimposition of price controls have often pointed to the success of such controls during the war. Yet, despite thousands of employees and an army of volunteer monitors associated with the Office of Price Administration and despite the U.S. Attorney General’s prosecutory zeal in hauling alleged violators into court, the government’s price-control efforts during World War II failed to stem the tide of rising prices set in motion by the huge contemporary increases in the money stock.
Price controls, at most, only create a population of liars. True prices continue to do what the existing economic conditions cause them to do. No one can control the amount of precipitation by passing a law against reporting more than a stipulated amount of rain and snow.
A government too grand to help its people
Jon Hammar saw combat in Iraq and Afghanistan, but his most brutal foreign experience was in Mexico. Last August, the 27-year-old former Marine corporal was incarcerated by Mexican authorities in Matamoros for trying to register an antique shotgun with customs agents. Foolishly, Cpl. Hammar followed instructions given to him by U.S. Border Patrol agents in Brownsville, Texas. He registered the gun with them and brought the paperwork to the Mexicans to get their stamp of approval in order to carry the gun through the country. Hammar and a friend were driving a Winnebago, hoping to have a nice surfing vacation with some hunting on the side.
Even though the Mexican authorities clearly saw that Hammar was trying to follow the rules, they seized the Winnebago and locked the corporal up in the notoriously corrupt CEDES prison anyway. There he was threatened by other inmates and told by guards that he could buy his way out of the hellhole by paying money to the "right people."
Hammar's parents, who live in South Florida, immediately contacted the State Department and were told to be patient. And so they were. Three months later, Hammar was still incarcerated and had not even seen a judge, and things were becoming increasingly desperate.
That's when his parents gave up on the State Department and contacted the media.
When the story crossed my desk, I found it hard to believe. Cpl. Hammar had served his country honorably, returned to the USA with post-traumatic stress disorder, been treated for nine months in California and simply wanted a vacation after his ordeal. It was obvious that he was being held on bogus charges, and the State Department seemed impotent. When we asked Secretary of State Hillary Clinton for a comment, she refused to say anything about the case. A few of her deputies visited Hammar in prison, but the official line was that State could do nothing more.
Sen. Bill Nelson and Rep. Ileana Ros-Lehtinen raised some hell about the situation, but things continued to deteriorate. Mexican authorities actually chained Hammar to his bed. Another inmate sent a picture of that out to the press.
In mid-December, the Fox News White House correspondent asked press secretary Jay Carney about the case. President Barack Obama's spokesman looked perplexed and said he did not know anything about it. As unbelievable as that sounds, I believe that Carney was telling the truth. And by telling one truth, Carney indicated another truth: Neither Obama nor Secretary of State Clinton had come to the aid of an American combat veteran who was being abused by Mexican authorities.
Disgusted by our apathetic government, I took the case directly to the government of Mexico. On national television, I bluntly told the new Mexican presidente, Enrique Pena Nieto, that if he did not release Hammar by Christmas, I would lead a boycott of Mexican tourism and products. The next day, Hammar was released after a Mexican judge ruled there had been no intent to commit a crime.
The ordeal cost the Hammar family tens of thousands of dollars in legal fees and untold emotional damage. Thankfully, the corporal did arrive home to South Florida in time to have a nice Christmas with his family. But this story is a cautionary tale for any American traveling outside the USA. If you get into trouble, you will be essentially on your own, even if you are a combat veteran. Our leaders in Washington are basically bureaucrats with short attention spans. If they couldn't work up the energy to help Jon Hammar, they are not going to help you.
True leadership means helping those who are powerless and sincerely need help. That takes time and energy. President Abraham Lincoln set aside one day a week to answer calls for help from the folks. The current administration would not answer a desperate call for months.
As for Mexico, it remains a corrupt country hostile to the rule of law. Let the buyer beware.
For more blog postings from me, see TONGUE-TIED, EDUCATION WATCH INTERNATIONAL, GREENIE WATCH, POLITICAL CORRECTNESS WATCH, FOOD & HEALTH SKEPTIC, AUSTRALIAN POLITICS, IMMIGRATION WATCH INTERNATIONAL, EYE ON BRITAIN and Paralipomena . GUN WATCH is now mainly put together by Dean Weingarten.
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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)
Franklin Delano Roosevelt was a war criminal. Both British and American codebreakers had cracked the Japanese naval code so FDR knew what was coming at Pearl Harbor. But for his own political reasons he warned no-one there. So responsibility for the civilian and military deaths at Pearl Harbor lies with FDR as well as with the Japanese. The huge firepower available at Pearl Harbor, both aboard ship and on land, could have largely neutered the attack. Can you imagine 8 battleships and various lesser craft firing all their AA batteries as the Japanese came in? The Japanese naval airforce would have been annihilated and the war would have been over before it began.
Posted by JR at 1:35 AM