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Archive for August, 2010

The Free Market Mojo site asked me a number of interesting questions about public policy. I’m not sure all of my answers were interesting, but here are some snippets that capture my curmudgeonly outlook.

I think it’s important to divide the topic into two issues, the policies that cause short-run fluctuations and the policies that impact long-run growth. Generally speaking, I try to avoid guessing games about what is happening today and tomorrow (or even yesterday), and instead focus on the policies that will boost the economy’s underlying productive capacity. …the Fed’s easy-money policy was a mistake. If the central bank had behaved appropriately, we presumably would not have suffered a financial crisis and recession. And if we go back in history, we find the Fed’s fingerprints whenever there is an economic meltdown. …I would not want the government to impose a gold standard. Competitive markets should determine the form of money and/or what backs up that money. Perhaps gold would emerge in such a competitive system, but a gold standard should not be imposed. …I don’t trust politicians. They would pass a bill to impose a VAT while simultaneously phasing out the income tax over a five-year period. But inevitably there would be some sort of “emergency” in year three and the income tax would be “temporarily” extended. When the dust settled, temporary would become permanent and we would be a decrepit European-style welfare state. …There are many great economists, but for my line of work, Milton Friedman has to be at the top of the list. He had an incredible ability to explain the benefits of liberty and the costs of statism in a way that reached average people.

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The gilded nobility otherwise known as politicians get lavish compensation packages, particularly when fringe benefits are part of the equation. But that doesn’t include their first class travel to exotic overseas locations. And even that doesn’t count the walking-around money they get – sometimes as much as $300 per day. But they’re supposed to actually spend their “per diem” money, not keep it, and this has gotten some of them in trouble. Here’s an excerpt from a Wall Street Journal report on the issue.
Congressional investigators are questioning a half-dozen lawmakers for possibly misspending government funds meant to pay for overseas travel, according to people familiar with the matter. …Congressional rules say the daily travel funds, called a per diem, must be spent on meals, cabs and other travel expenses. But when lawmakers travel, many of their meals and expenses are picked up by other people, such as foreign government officials or U.S. ambassadors. That can leave lawmakers with leftover money. Lawmakers routinely keep the extra funds or spend it on gifts, shopping or to cover their spouses’ travel expenses, according to dozens of current and former lawmakers. The cash payments vary according to the cost of living and range from about $25 a day in Kabul to more than $250 a day in one part of Japan. Lawmakers also usually request and receive an additional $50 a day. Leftover funds can add up to more than $1,000 a trip for longer visits to expensive regions. …The travel inquiry is the latest in a string of ethics investigations in the House that could hurt Democrats at the polls in November by undermining the party’s message that it has “drained the swamp” of ethics abuses in Washington. The House ethics committee is also pursuing high-profile cases against Democratic Reps. Charles Rangel of New York and Maxine Waters of California. Both lawmakers could face public proceedings in coming weeks that would be the congressional equivalent of a trial.

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One of the big problems with statists is that they define compassion incorrectly. They think they are being compassionate when they take other people’s money and give it to somebody that they define as being less fortunate. But genuine compassion occurs when you spend your own money. Another problem is that they define compassion by the number of people getting handouts from the government. A truly compassionate person, however, should strive for a society where the less fortunate are able to climb the economic ladder and no longer are dependent on redistribution programs. So it is definitely bad news that a record number of people – one out of six – now are on the dole in some form or fashion. Part of this growth in dependency is due to the economic downturn, but USA Today also notes that politicians have expanded eligibility and lured more people into dependency.
Government anti-poverty programs that have grown to meet the needs of recession victims now serve a record one in six Americans and are continuing to expand. More than 50 million Americans are on Medicaid, the federal-state program aimed principally at the poor, a survey of state data by USA TODAY shows. That’s up at least 17% since the recession began in December 2007. …More than 40 million people get food stamps, an increase of nearly 50% during the economic downturn, according to government data through May. The program has grown steadily for three years. Caseloads have risen as more people become eligible. The economic stimulus law signed by President Obama last year also boosted benefits. …Close to 10 million receive unemployment insurance, nearly four times the number from 2007. Benefits have been extended by Congress eight times beyond the basic 26-week program, enabling the long-term unemployed to get up to 99 weeks of benefits. …As caseloads for all the programs have soared, so have costs. The federal price tag for Medicaid has jumped 36% in two years, to $273 billion. Jobless benefits have soared from $43 billion to $160 billion. The food stamps program has risen 80%, to $70 billion. Welfare is up 24%, to $22 billion. …The steady climb in safety-net program caseloads and costs has come as a result of two factors: The recession has boosted the number who qualify under existing rules. And the White House, Congress and states have expanded eligibility and benefits.

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This story from St. Louis, which my Cato colleague Walter Olson cites in a post about OSHA, is a typical example of bureaucratic stupidity and absurd “safety” laws. My favorite part is that the bureaucrat actually thought it would be reasonable to rent a lift for $750 per day just to attach a harness for somebody working only 11 feet off the ground. I’m sure the consumer would have been happy to swallow that additional cost. Reminds me of the classic Dave Barry column I cited in this post. Good to see that the Occupational Safety and Health Administration is just as incompetent today as it was decades ago.

In April, Heffernan and his nephew were working on a house in the 6400 block of January Avenue. Heffernan had finished rebuilding the chimney and his nephew was finishing up the job when Heffernan left to bid a job in West County. While he was looking at the prospective new job, he got a call from his nephew. There was some kind of a problem with an inspector. Heffernan returned to the site on January Avenue and found that an inspector for the Occupational Safety and Health Administration had shut down the site. In other words, she had told Heffernan’s nephew to stop working. Heffernan was taken back. …He said the inspector had written several citations. The first thing she told him was his scaffold wasn’t level. He said he pulled out his level and put it on the scaffold to show that the scaffold was level. He said the inspector then wrote down the brand name of the level, as if there might be something wrong with his equipment. …He said he offered to let the inspector walk on the scaffold, but she declined and said she was afraid of heights. The inspector told him his nephew needed a helmet and a safety harness. “We have safety harnesses. If the job requires it, we wear them,” Heffernan said. “But my nephew was only about 11 feet off the ground. I told the inspector I didn’t know what I was supposed to attach the harness to. She told me I could rent a lift and run the main pole above the chimney and have the safety line from that hooked to my nephew. A lift costs about $750 a day. It made no sense.” …Heffernan received notice in the mail that he had been cited for three violations. …Heff’s Tuckpointing is a successful operation, but it cannot afford $3,600 in fines. …So Heffernan requested a meeting to contest the violations. He said he spoke with an OSHA compliance officer who offered to drop the first violation and reduce the fines of the other two by 40 percent. Heffernan refused the offer. He has now requested a formal hearing.

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According to news coverage, United Kingdom Prime Minister Cameron is imposing deep and savage budget cuts. I was interviewed by the BBC recently, for instance, and asked whether 25 percent spending reductions were too harsh. And here’s an excerpt from a New York Times story that is very representative of the news coverage.

Like a shipwrecked sailor on a starvation diet, the new British coalition government is preparing to shrink down to its bare bones as it cuts expenditures by $130 billion over the next five years and drastically scales back its responsibilities. The result, said the Institute for Fiscal Studies, a research group, will be “the longest, deepest sustained period of cuts to public services spending” since World War II. …Public-sector unions are planning a series of strikes. Charities — which Mr. Cameron has said should take over some of the responsibilities now held by the state — say that they are at risk of collapse because they are so dependent on government money. And the chief executive of the Supreme Court, the country’s highest, said she did not know whether the court would be able to function at all if its budget were cut by 40 percent.

To be blunt, this type of analysis is completely false. There are no budget cuts in the United Kingdom, at least in terms of total government spending. Instead, the politicians are measuring cuts against some imaginary baseline, which is the same scam that happens in Washington. So if spending increases by 4 percent instead of 7 percent, that is characterized as a 3 percent budget reduction. The chart shows what is happening with overall government spending in the United Kingdom. Notwithstanding phony stories about budget cuts, spending in Prime Minister Cameron’s first year is climbing by more than 4 percent – twice as fast as needed to keep pace with inflation.

This doesn’t mean that Cameron isn’t doing anything right. There is a two-year pay freeze for bureaucrats, for instance, which is at least a small step in the right direction. But the Tory-Liberal Democrat coalition is not a good role model for those who want limited government and fiscal responsibility. There are promises of spending restraint in future years, but those belong in the I’ll-believe-it-when-I-see-it category. Spending is supposed to increase by less than 1 percent in next year’s budget, for instance, but politicians are very good with tough talk of fiscal discipline in future years. But if we judge them by what they’re doing today rather than what they’re claiming will happen in the future, Cameron’s policies leave much to be desired.

The tax side of the fiscal equation is even more depressing. There is small reduction in the corporate tax rate, but otherwise there is considerable bad news. The new government is leaving in place the new 50 percent top tax rate imposed by Gordon Brown as an election-year class-warfare gimmick. It is boosting the capital gains tax rate from 18 percent to 28 percent. And it increased the VAT rate from 17.5 percent to 20 percent.

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Steve Chapman of the Chicago Tribune makes several excellent points in his column on the recent salmonella scare, commenting on the absurd tendency to reward government bureaucracies that screw up. But more important, he explains that there are very strong incentives for safety in an unfettered marketplace. The fundamental issue, though, is that there is no way of completely eliminating risk in society, so the responsible approach is finding the best ways to minimize risk without imposing excessive costs. Relying on free markets is surely the best answer, though the government does have a role. As Chapman notes, a well-functioning tort system ensures that companies can be punished by people who suffer damages. Command-and-control regulation, by contrast, is a very expensive and inflexible approach.

In the private sector, entities that fall short of doing their jobs find themselves forced to shrink. In the public sector, the opposite is typically true. Failure is an option, and often a beneficial one. The Federal Reserve Board and Treasury facilitated the 2008 financial crisis? Then obviously we have no choice but to give them even more responsibility. The Securities and Exchange Commission let Bernie Madoff rob investors? A bigger SEC will be a smarter SEC. Just once, I’d like to see a government official say, “We blew it, and you know what? If you give us another chance, we’ll probably blow it again.” But so far, my hope has not availed. It’s true that the FDA is charged with assuring food safety. But really, the government can’t do that. The task is too big and too complex. Fortunately, it doesn’t have to do it, because the pressures of competition force producers to make sure their goods are clean and wholesome. What goes curiously unnoticed is that egg suppliers and grocery stores have nothing to gain from sickening their customers — and a lot to lose. It doesn’t take many obvious hygiene lapses for a company to get a bad reputation, and a bad reputation can be catastrophic. In 1971, a New York man died of botulism after eating a can of Bon Vivant soup. If you’ve never heard of Bon Vivant soup, there’s a simple explanation: In no time at all, the company was bankrupt and the brand was as defunct as William McKinley. The farms implicated in this episode are likely to find themselves oddly short of buyers in the coming months, if not years — unless they can prove they have taken drastic steps to clean up their act. But the burden of proof will be on them. They can also expect to be sued for huge sums of money. Meanwhile, there are plenty of other companies that didn’t screw up, whose wares will be more attractive going forward.

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In the private sector, no business owner would be dumb enough to assume that higher prices automatically translate into proportionately higher revenues. If McDonald’s boosted hamburger prices by 30 percent, for instance, the experts at the company would fully expect that sales would decline. Depending on the magnitude of the drop, total revenue might still climb, but by far less than 30 percent. And it’s quite possible that the company would lose revenue. In the public sector, however, there is very little understanding of how the real world works. Here’s a Reuters story I saw on Tim Worstall’s blog, which reveals that Bulgaria and Romania both are losing revenue after increasing tobacco taxes.

Cash-strapped Bulgaria and Romania hoped taxing cigarettes would be an easy way to raise money but the hikes are driving smokers to a growing black market instead. Criminal gangs and impoverished Roma communities near borders with countries where prices are lower — Serbia, Macedonia, Moldova and Ukraine — have taken to smuggling which has wiped out gains from higher excise duties. Bulgaria increased taxes by nearly half this year and stepped up customs controls and police checks at shops and markets. Customs office data, however, shows tax revenues from cigarette sales so far in 2010 have fallen by nearly a third. …Overall losses from smuggling will probably outweigh tax gains as Bulgaria struggle to fight the growing black market, which has risen to over 30 percent of all cigarette sales and could cost 500 million levs in lost revenues this year, said Bezlov at the Center for the Study of Democracy. While the government expected higher income from taxes in 2010 it has already revised that to the same level as last year. “However, this (too) looks unlikely at present,” Bezlov added. Romania, desperately trying to keep a 20 billion-euro International Monetary Fund-led bailout deal on track, has a similar problem after nearly doubling cigarette prices in 2009 then hiking value added tax. Romania’s top three cigarette makers — units of British American Tobacco, Japan Tobacco International and Philip Morris — contributed roughly 2 billion euros to the budget in taxes in 2009, or just under 2 percent of GDP. They estimate about a third of cigarettes in Romania are smuggled and say this could cost the state over 1 billion euros.

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Heading back to Washington after a couple of days at the High Lonesome Ranch and a couple of days at the Steamboat Institute Freedom Conference. The High Lonesome Ranch is a great example of private conservation, with some of the nation’s highest concentrations of black bears and mountain lions. The Steamboat Institute conference was a great gathering of free-market people. I spoke on (what a surprise) fiscal policy. The most amusing part of the conference was during Karl Rove’s speech, when he remarked that “Dan Mitchell thinks I’m a dangerous liberal.” I actually think he’s an operational statist, but read this, this, and this and you be the judge.

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U.S. News & World Report notes that the Environmental Protection Agency has rejected a scheme from left-wing organizations to ban the use of ammunition containing lead. This is a welcome decision, particularly since the EPA is a very radical organization that traditionally is willing to bend the law to advance ideological goals (proposing carbon dioxide regulations to push the global warming agenda through the back door, for instance, as well as regulating swampy land even though its jurisdiction applies only to navigable waterways). Kudos to the National Rifle Association and other groups that flexed enough muscle to scare off the bureaucrats at the EPA.

In a swift and unexpected decision, the Environmental Protection Agency today rejected a petition from environmental groups to ban the use of lead in bullets and shotgun shells, claiming it doesn’t have jurisdiction to weigh on the controversial Second Amendment issue. The decision came just hours after the Drudge Report posted stories from Washington Whispers and the Weekly Standard about how gun groups were fighting the lead bullet ban. The EPA had planned to solicit public responses to the petition for two months, but this afternoon issued a statement rejecting a 100-page request from the Center for Biological Diversity, the American Bird Conservancy, and three other groups for a ban on lead bullets, shot, and fishing sinkers. The agency is still considering what to do about sinkers. The decision was a huge victory for the National Rifle Association which just seven days ago asked that the EPA reject the petition, suggesting that it was a back door attempt to limit hunting and impose gun control. It also was a politically savvy move to take gun control off the table as the Democrats ready for a very difficult midterm election.

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I know I’ve beaten this drum several times before, but the Wall Street Journal today has a very good explanation of why class-warfare tax policy will backfire. The Journal’s editorial focuses on what happened after the 2003 tax rate reductions. And below the excerpt, you’ll find a table I prepared showing what happened with tax revenues from the rich following the Reagan tax cuts. The simple message is that lower tax rates are the best way to soak the rich.
Congress’s Joint Committee on Taxation recently dropped a study claiming that millionaires will pay $31 billion of the $36 billion in revenue that it expects will be raised next year if tax rates rise as scheduled on January 1. …If you believe that, you probably also believed Joint Tax when it predicted that the rich would gain a huge tax windfall when tax rates were cut in 2003. Let’s go to the videotape. According to the most recent IRS data on actual tax payments, total revenues collected over the period 2003-07 were about $350 billion higher than Joint Tax and the Congressional Budget Office predicted when the 2003 tax cuts were enacted. Moreover, the wealthiest taxpayers paid a larger share of all income taxes from the beginning to the end of this period. The IRS data show that in 2003 those with incomes above $200,000 paid $313 billion in income tax. By 2007 they paid $610 billion. …Guess what income group paid the most in higher taxes after tax rates were cut? Millionaires. From 2003 to 2008, millionaires increased their tax payments to $249 billion from $132 billion. One reason for the big increase in payments: the number of returns declaring $1 million or more in income increased 76% to 319,000 from 181,000 as the economy expanded. The IRS data are a useful reminder of how dependent Uncle Sam is on the rich to pay the government’s bills. …We’re not saying that tax cuts “pay for themselves.” What we are saying is that the 2003 tax cuts proved again, as we should have learned in the 1960s and 1980s, that rich people are the most responsive to changes in tax rates. When tax rates are high, the wealthy invest less, hire accountants to protect more of their income from the IRS, and park more of their money in tax shelters, such as municipal bonds. …That’s why it’s a fantasy to think that raising income and capital gains and dividend tax rates on the rich is going to pry $31 billion out of millionaire households. History teaches that the best way to soak the rich and reduce the deficit is to promote rapid economic growth. But that’s less likely to happen in 2011 if the economy is rear-ended with the biggest tax increase in at least 16 years.

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Actually, I wish that were true. But I’m slightly amused to see that I’m ranked as the 244th most-influential person in the world of global finance according to the FCI500 Index put together by Financial Centres International. George Soros ranks 262 and Paul Krugman is way down at 407. I don’t actually deal with money, of course. My role in this field is to fight for tax competition, largely by seeking to derail the tax harmonization schemes of international bureaucracies such as the Organization for Economic Cooperation and Development, European Commission, and United Nations. Here are the top 10 and three other people you will recognize.

1 Mario Draghi – Governor Banca d’Italia
2 Timothy Geithner – Secretary of the Treasury US Department of the Treasury
3 Barney Frank – Congressman United States House of Representatives
4 Dominique Strauss-Kahn – Managing Director International Monetary Fund
5 Josef Ackermann – Chairman of the Management Board and the Group Executive Committee Deutsche Bank AG
6 Nout Wellink – President De Nederlandsche Bank
7 Zhou Xiaochuan- Governor People’s Bank of China
8 Michel Barnier – Commissioner for the Internal Market and Services European Commission
9 Jean-Claude Trichet – President European Central Bank
10 Stefan Walter – Secretary General Basel Committee on Banking Supervision







244 Daniel J. Mitchell – Senior Fellow The Cato Institute


262 George Soros – Hedge Fund Manager Quantum Mutual Funds.





407 Paul Krugman – Columnist and Economist New York Times

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Two things struck me about this debate. First, the guy from the Center for American Progress was either clueless or dishonest about double taxation. Second, nobody seems to understand that balancing the budget is a simple matter of restraining the growth of government spending. I want deep cuts, but that’s not even necessary.

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Here’s a very disturbing story I saw on Instapundit. A cop arrested a woman for the supposed crime of not getting off her own front porch. Apparently, the cop didn’t like the fact that she was observing – and perhaps even filming on her cell phone camera – a traffic stop. If there is any justification for what the cop did, it certainly is not apparent from the full story. What’s particularly disturbing is not just that the cop made a seemingly abusive arrest, but that a judge then convicted the woman. Libertarians instinctively will be skeptical of the government in this case, but I hope that viewed is widely share. Our Founding Fathers gave us a Constitution that limited the power of government, and there should be a clear and compelling reason before an individual is stepped on by the police power of the state. If you rob, rape, and murder, those are good reasons. Standing on your court and filming a traffic stop doesn’t pass that test.
The resisting-arrest conviction last week of Felicia Gibson has left a lot of people wondering. Can a person be charged with resisting arrest while observing a traffic stop from his or her own front porch? Salisbury Police Officer Mark Hunter thought so, and last week District Court Judge Beth Dixon agreed. Because Gibson did not at first comply when the officer told her and others to go inside, the judge found Gibson guilty of resisting, delaying or obstructing an officer. Gibson was not the only bystander watching the action on the street. She was the only one holding up a cell-phone video camera. But court testimony never indicated that Hunter told her to stop the camera; he just told her to go inside.

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Here’s another remarkable story illustrating the incompetence of government. A bureaucrat in Norfolk, VA, got paid for 12 years (including benefits) without ever showing up for work. Depending on the agency, this may actually have been a good thing (I wish IRS bureaucrats did this), but it certainly shows how taxpayer money gets wasted when nobody is accountable and there is no bottom-line incentive to use money effectively.
A Community Services Board employee collected a salary with benefits for 12 years and never showed up for work, several City Council members said Wednesday. The head of the agency refused to identify the employee but acknowledged in response to inquiries from The Virginian-Pilot that an employee was “on the board’s payroll who had not reported to work in years.” Maureen Womack, the agency’s executive director, said she fired the employee, informed the board that governs her agency and asked City Attorney Bernard A. Pishko to investigate the matter earlier this summer. Pishko’s investigation is nearly complete and will soon be turned over to the Norfolk police, she said. Womack also refused to divulge the employee’s salary. The council also was told in a recent closed meeting that at least one other staffer, a Community Services Board supervisor, is being investigated for alleged complicity. …Councilman Tommy Smigiel said recent revelations about the Community Services Board employee and other matters, including the profligate use of a city credit card by the Commissioner of Revenue and the purchase of a cell phone with city funds for a gang member by an assistant to the city manager, are doing “serious damage” to Norfolk’s image.

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I think I did okay in this debate, but my opponent wanted me to defend Bush and didn’t seem to get my point that I don’t like big-spending interventionists, regardless of whether they have a D or R after their names.

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One of the many disappointing things about Republicans is that they fail to correct problems when they get power. After the 1994  “Gingrich Revolution,” the GOP had complete control of Capitol Hill. This meant complete authority over the Congressional Budget Office and Joint Committee on Taxation. Did Republicans use this power to fire the old staff and put in people who understood economics? Of course not. I don’t know if this is because Republicans are stupid or if it’s because they’re too timid to take steps that would generate complaints from their enemies. Regardless, what really matters is that CBO and JCT are just as biased today as they were 20 years ago. Diana Furchtgott-Roth of the Hudson Institute exposes CBO’s latest shoddy Keynesian analysis. She is correct, and the people making these same arguments 20 years ago were correct. And I’m afraid people will be saying the same things 20 years from now. Which leads me to think that maybe the best approach is to get rid of these bureaucracies. 
…on Tuesday the nonpartisan Congressional Budget Office issued a report showing that the American Recovery and Reinvestment Act of 2009 increased the number of people employed by between 1.4 and 3.3 million people in the second quarter of 2010 and lowered unemployment by 0.7 to 1.8 percentage points. CBO concludes that without the Recovery Act unemployment, which stood at 9.5% in July, might exceed 10% and possibly be above 11%. There’s just one problem. CBO’s latest figures are inconsistent with its claims of the effects of the stimulus bill when it was passed in February 2009. If its models failed to accurately predict the effects of the stimulus bill then, why should we believe the models now? This is important because some are taking the CBO report as proof that the stimulus bill is working and so we need…more stimulus. …After passage of the stimulus bill, in a March 2009 letter to Iowa Senator Chuck Grassley, CBO predicted that the unemployment rate in the last quarter of 2009 would rise to 9% without the stimulus package, from its then-current level of 8.2%. With the stimulus, CBO said, the unemployment rate would range from 7.8% to 8.5%. The actual rate in December, 11 months after enactment of the stimulus, was 10%, far higher than CBO said it would be absent the stimulus. …If Americans had known in February of 2009 that the $787 billion stimulus package (whose cost CBO later raised to $862 billion) would not lead to declines in unemployment, but instead a substantial increase in the unemployment rate to 9.5%, opposition to the spending would have been practically universal. Put it another way – if Americans were asked now whether they would prefer today to have back the February 2009 unemployment rate of 8.2% and the $862 billion spent on stimulus, they would say yes. Some say things would have been worse if the stimulus funds had not been spent. They assume that more government spending, including the $862 billion stimulus, must be good for the economy. This form of Keynesian economics fell out of fashion decades ago everywhere, except in the halls of power in Washington. If more government spending always helped the economy, why stop at $862 billion? Why not give each American an unlimited bank account? Then the unemployment rate would likely rise to 100%. But some economists would still offer unverifiable models to “prove” the benefit to the American public.

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I thought it was shocking when Senator Bennett of Utah was denied renomination, but I’m even more stunned that Senator Murkowski of Alaska is trailing her opponent in preliminary results from Tuesday’s primary. As the Wall Street Journal explained in an editorial this morning, this is a big sign that voters are not merely interested in electing big-government Republicans instead of big-government Democrats. They actually want leaders who will fight to limit government and expand freedom. After nearly 10 years of Bush-Obama statism, I’m very happy to see the American people still value liberty.
GOP Members of Congress who think they can return to business as usual if they regain the majority should pay attention. The biggest shock came in Alaska, with incumbent Senator Lisa Murkowski trailing unheralded challenger Joe Miller by roughly 1,700 votes with as many as 16,000 absentee ballots still to be counted. …Though heavily outspent, Mr. Miller was helped by former Governor Sarah Palin’s endorsement and especially by Ms. Murkowski’s failure to understand the anti-Washington mood. When he asked Senator Murkowski in a debate which part of the Constitution permitted Roe v. Wade and bank bailouts, she responded that the nation might suffer if the government only funded things explicitly authorized by the Constitution. Bad answer. Ms. Murkowski opposed ObamaCare but Alaskans punished her for her 2009 refusal to rule out a government-run health-care plan. She is learning the lesson that ousted Utah Senator Bob Bennett did: GOP voters don’t want their representatives to negotiate with President Obama. They’re looking for people who can defeat his agenda.

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Unfortunately, I’m not talking about President Obama, though the current occupant of the White House could learn a lot from a previous Democratic President.

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One of the main factors determining incumbent election success is economic performance. When disposable income is rising and people feel good about the future, it is difficult for an incumbent to lose. So why, then, is Obama pursuing policies that are undermining growth? Sure, it is in the interests of the left in the long run to create more dependency on government. That’s one of the reasons why there is nothing resembling a free market party in most European nations. But America isn’t at that stage yet (thankfully). And as John Stossel writes, Obama’s bad government policy is causing joblessness and uncertainty. This is going to hurt Democrats this November and may linger until 2012, when Obama would suffer the consequences (in the unlikely event that Republicans put forth a semi-decent candidate).
Why isn’t the economy recovering? After previous recessions, unemployment didn’t get stuck at close to 10 percent. If left alone, the economy can and does heal itself, as the mistakes of the previous inflationary boom are corrected. The problem today is that the economy is not being left alone. Instead, it is haunted by uncertainty on a hundred fronts. When rules are unintelligible and unpredictable, when new workers are potential threats because of Labor Department regulations, businesses have little confidence to hire. President Obama’s vaunted legislative record not only left entrepreneurs with the burden of bigger government, it also makes it impossible for them to accurately estimate the new burden. In at least three big areas — health insurance, financial regulation and taxes — no one can know what will happen. …Nothing more effectively freezes business in place than what economist and historian Robert Higgs calls “regime uncertainty.”

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Unlike the United States and most European nations, Chile does not face a long-term Social Security crisis. This is because lawmakers shifted to a system of personal accounts almost 30 years ago. As a result, Chile’s economy is much stronger, the financial system is healthy, workers are better off, and taxpayers are protected. It also turns out that a system of personal accounts has a positive impact on the labor supply of older workers. Instead of getting lured into retirement by a punitive tax-and-transfer government system, they remain active to reap the rewards of a system that rewards them (rather than tax collectors) for continued work. A former World Bank expert has the details in a new report from the National Center for Policy Analysis.
American workers live longer each decade but they continue to retire early. They often begin receiving Social Security benefits, quit working and stop contributing to national output well before age 65. Reversing these trends must be an important objective when designing long-term reforms to balance revenues and expenditures on elderly entitlements. Chile faced similar problems prior to 1981. It had a traditional pay-as-you-go defined benefit system, like Social Security in the United States. Workers had strong incentives to start their retirement benefits as soon as possible, because postponing pensions and adding contributions did not increase benefits commensurately. Labor force participation dropped dramatically when workers became eligible for pensions. This changed with reforms in 1981 that replaced the defined benefit system with a defined contribution system. All new workers were required to join the defined contribution system while existing workers had a choice. Most workers are now in the new system and are required to contribute 10 percent of their wages to an individual account. Contributions are invested in a pension fund chosen by the worker and accumulate a market rate of return. Payouts take the form of inflation-protected annuities or gradual withdrawals during retirement. The new system increased incentives for older workers to postpone retirement and continue working. The response was dramatic….Following the 1981 policy changes and reforms, and after controlling for other sources of change in retirement behavior, the percentage of individuals receiving early benefits fell significantly: The proportion who received benefits before age 65 decreased by about 8 percentage points. The proportion of individuals who started receiving retirement benefits by their early 60s fell by about a quarter. The proportion who started receiving benefits by their 50s was cut in half. Postponing the commencement of benefits could be due to market returns on additional contributions, which made workers more willing to continue working in order to save more money for retirement. Or it could be due to tighter preconditions on early retirement, which required more individuals to continue working until age 65. Tighter preconditions seem to dominate, as the percentage of individuals who receive benefits after 65 has not changed. More older workers kept working following the reform, after controlling for other factors: Labor force participation rates for individuals in their 50s rose 12 percentage points. Labor force rates rose 13 percentage points for those aged 65-70. Individuals aged 60-64 increased their labor force participation the most – by 19 percentage points. The biggest change in labor force participation was for individuals who had started receiving benefits from their retirement accounts: Participation rates rose by 15 percentage points for pension recipients in their late 60s. Rates rose by 28 percentage points for those in their 50s and early 60s. Among all pension recipients under age 70, the proportion who continued working more than doubled.

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I think Viagra subsidies for sex offenders are an absurd example of government stupidity in America. I’m also amazed that European taxpayers are forced to pay for penile implants for bureaucrats at the European Commission. But I’m almost speechless to learn that British taxpayers are financing hanky-panky with prostitutes in Amsterdam for some disabled citizens. According to the Daily Mail, taxpayers across the pond also are paying for lap dances, though it’s unclear why some beneficiaries get deluxe “full service” trips to foreign countries while others must make do with trips to local strip clubs. I have great sympathy for people who are disabled, and I certainly have no problem with them purchasing sexual services, but I agree with the guy from the Disability Alliance that this is not an appropriate role for government.

A ‘man of 21 with learning disabilities has been granted taxpayers’ money to fly to Amsterdam and have sex with a prostitute. His social worker says sex is a ‘human right’ for the unnamed individual – described as a frustrated virgin. His trip to a brothel in the Dutch capital’s red light district next month is being funded through a £520million scheme introduced by the last government to empower those with disabilities. They are given a personal budget and can choose what services this is spent on. The man’s social worker, who spoke on the condition of anonymity, said his client was an ‘angry, frustrated and anxious young man’ who had a need for sex. …The trip emerged in data from Freedom of Information requests which revealed that many councils are using the money from the government’s Putting People First scheme to pay for prostitutes, visits to lap dancing clubs and exotic holidays. …Critics yesterday said the use of taxpayers’ money to fund sex trips abroad as ‘deeply worrying’. In Greater Manchester and Norfolk, social care clients have used their payments for internet dating subscriptions. …Neil Coyle, director of policy at Disability Alliance, said most people with disabilities did not want or expect the state to pay for sexual services. ‘Public bodies don’t exist to find people sexual partners,’ he said.

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I take second place to nobody in my view that government is horribly incompetent, but I even I’m shocked by this story I saw linked on Drudge. According to a news report out of Indiana, students who take the government’s driver’s ed class are four times more likely to crash than those who don’t take the classes. There almost certainly must be other factors that account for this surprising difference, as suggested in the excerpt below. After all, even I don’t believe bureaucrats can turn people into more dangerous drivers. At the very least, though, this presumably shows that government classes have no positive impact. Maybe the right way to deal with young drivers is to put parents back in charge, backed up by the discipline of auto insurance rates determined by market forces. How’s that for a radical idea?

Indiana lawmakers say they are puzzled by a study that shows teenagers who take driver’s education classes are more likely to crash than those who do not take the classes. The Indiana BMV released the study that it says shows current drivers under 18 who took driver’s ed had nearly four times the crashes than those without the training. Some lawmakers say it might be time for an overhaul. The state’s drivers ed program has not changed in the past 30 years. But the BMV says the numbers might be skewed by the fact that teens with driver’s ed get their permits earlier and have more time on the road.

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In a very predictable editorial this morning, the New York Times pontificated in favor of higher taxes. Compared to Paul Krugman’s rant earlier in the week, which featured the laughable assertion that letting people keep more of the money they earn is akin to sending them a check from the government, the piece seemed rational. But that is damning with faint praise. There are several points in the editorial that deserve some unfriendly commentary.

First, let’s give the editors credit for being somewhat honest about their bad intentions. Unlike other statists, they openly admit that they want higher taxes on the middle class, stating that “more Americans — and not just the rich — are going to have to pay more taxes.” This is a noteworthy admission, though it doesn’t reveal the real strategy on the left.

Most advocates of big government understand that it will be impossible to turn America into a European-style welfare state without a value-added tax, but they don’t want to publicly associate themselves with that view until the political environment is more conducive to success. Most important, they realize that it will be very difficult to impose a VAT without seducing some gullible Republicans into giving them political cover. And one way of getting GOPers to sign up for a VAT is by convincing them that they have to choose a VAT if they don’t want a return to the confiscatory 70 percent tax rates of the 1960s and 1970s. Any moves in that direction, such as raising the top tax rate from 35 percent to 39.6 percent next January, are part of this long-term strategy to pressure Republicans (as well as naive members of the business community) into a VAT trap.

Shifting to other assertions, the editorial claims that “more revenue will be needed in years to come to keep rebuilding the economy.”  That’s obviously a novel assertion, and the editors never bother to explain how and why more tax revenue will lead to a stronger economy. Are the folks at the New York Times not aware that both economic growth and living standards are lower in European nations that have imposed higher tax burdens? Heck, even the Keynesians agree (albeit for flawed reasons) that higher taxes stunt growth.

The editorial also asserts that, “Since 2002, the federal budget has been chronically short of revenue.” I suppose if revenues are compared to the spending desires of politicians, then tax collections are – and always will be – inadequate. The same is true in Greece, France, and Sweden. It doesn’t matter whether revenues are 20 percent of GDP or 50 percent of GDP. The political class always wants more.

But let’s actually use an objective measure to determine whether revenues are “chronically short.” The Democrat-controlled Congressional Budget Office stated in its newly-released update to the Economic and Budget Outlook that federal tax revenues historically have averaged 18 percent of GDP. They are below that level now because of the economic downturn, but CBO projects that revenues will climb above that level in a few years – even if all of the 2001 and 2003 tax cuts are made permanent. Moreover, OMB’s historical data shows that revenues were actually above the long-run average in 2006 and 2007, so even the “since 2002″ part of the assertion in the editorial is incorrect.

On the issue of temporary tax relief for the non-rich, the editorial is right but for the wrong reason. The editors rely on the Keynesian rationale, writing that, “low-, middle- and upper-middle-income taxpayers…tend to spend most of their income and the economy needs consumer spending” whereas “Tax cuts for the rich can safely be allowed to expire because wealthy taxpayers tend to save rather than spend their tax savings.”

I’ve debunked Keynesian analysis so often that I feel that I deserve some sort of lifetime exemption from dealing with this nonsense, but I’ll give it another try. Borrowing money from some people in the economy and giving it to some other people in the economy is not a recipe for better economic performance. Economic growth means we are increasing national income. Keynesian policy simply changes who is spending national income, guided by a myopic belief that consumer spending somehow is better than investment spending. The Keynesian approach didn’t work for Hoover and Roosevelt in the 1930s, it didn’t work for Japan in the 1990s, and it hasn’t worked for Obama.

And it doesn’t matter if the Keynesian stimulus is in the form of tax rebates. Gerald Ford’s rebate in the 1970s was a flop, and George W. Bush’s 2001 rebate also failed to boost growth. Tax cuts can lead to more national income, but only if marginal tax rates on productive behavior are reduced so that people have more incentive to work, save, and invest. This is an argument for extending the lower tax rates for all income classes, but it’s important to point out that the economic benefits will be much greater if the lower tax rates are made permanent.

Last but not least, the editorial asserts that, “The revenue from letting [tax cuts for the rich] expire — nearly $40 billion next year — would be better spent on job-creating measures.” Not surprisingly, there is no effort to justify this claim. They could have cited the infamous White House study claiming that the so-called stimulus would keep unemployment under 8 percent, but even people at the New York Times presumably understand that might not be very convincing since the actual unemployment rate is two percentage points higher than what the Obama Administration claimed it would be at this point.

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Working in Washington is a frustrating experience for many reasons, but my personal nightmare is that bad ideas refuse to die. Keynesian economics is a perfect example. It doesn’t matter that Keynesian deficit spending didn’t work for Hoover and Roosevelt. It doesn’t matter that it didn’t work for the Japanese all through the 1990s. It doesn’t matter that it didn’t work for Bush in 2008. And it doesn’t matter that it hasn’t worked for Obama. The statists simply shrug their shoulders and say there wasn’t enough spending. Or that the economy would have been even worse with all the so-called stimulus. With this in mind, I was initially excited to read Kevin Hassett’s obituary for Keynesianism, but then I sobered up and realized that evidence is not enough to win this debate. Like a vampire or a Freddy Krueger movie, the bad guy (or bad idea) keeps getting resurrected. So while Kevin’s article is very compelling, I don’t expect that it will stop politicians from doing the wrong thing in the future.

…some Keynesians who supported Barack Obama’s $862 billion stimulus now claim it fell short of their goals not because the idea was flawed, but because the spending package was too small. Christina Romer, the departing chairman of Obama’s Council of Economic Advisers, has become a minor cult hero to the Keynesians, thanks to news reports that said her analysis in 2009 suggested the stimulus should be in the range of $1.2 trillion, or 40 percent larger than it turned out to be. The notion that a much-larger U.S. stimulus would have been more successful isn’t backed up by evidence. Maybe there would be an argument if some countries were now booming because their stimulus packages were larger. Or if some previous U.S. administration had tried a bigger stimulus and had better luck. The fact is, the U.S. stimulus was the largest among members of the Organization for Economic Cooperation and Development, and the biggest ever tried in the U.S. Nor does the academic literature support what we might call these Not-Enough Keynesians. A 2002 study by economists Richard Hemming, Selma Mahfouz and Axel Schimmelpfennig of recessions in 27 developed economies from 1971 to 1998 found that increased spending by government had, in almost all cases, a barely noticeable impact, and sometimes a negative one. Heavily indebted countries that spent more in recessions grew about 0.5 percent less, relative to trend, than countries that didn’t, the study found. …Supporters of this type of stimulus are either unfamiliar with the literature or willing to ignore it. The result is policy that is harmful to our country and inconsistent with modern economic science. If the Obama economic team were medical doctors, they would be pushing the use of medicine not approved by the Food and Drug Administration. As the economic data again head south, it will be much harder to devise successful economic policies because of the budgetary hole that the Keynesians have dug for us. In all likelihood, the data will soon be so convincingly bad that we’ll again debate the need for an economic stimulus. Let’s hope that when that begins, all will finally concede that the ideas of John Maynard Keynes are as dead as the man himself, and that Keynesianism is the real voodoo economics.

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If misery loves company, we can be very happy with these two stories about over-compensated bureaucrats from outside our borders. The first comes from Europe, where the Daily Telegraph reports that pension costs are skyrocketing for bureaucrats with the European Commission and other European Union entities. With the average pension being more than $88,000 per year, that’s hardly a surprise. This adds injury to injury since EU bureaucrats already get paid much more than workers in the productive sector of the economy.

Internal estimates, seen by The Daily Telegraph, show huge cost increases as growing numbers of officials in an expanded EU qualify for retirement, often at a younger age than the taxpayers who fund their generous pensions. Over the next three years alone, the cost of EU civil service pensions is expected to rise by 16 per cent to an annual bill for taxpayers of £1.3 billion. … EU officials are allowed to retire at the age of 63, younger than Britons who have just had their retirement age increased from 65 to 66 by 2016. …According to unpublished Commission figures, the pension bill will by 2040 risen 97 per cent to over £2 billion, with a British contribution of over £350 million. …The average annual pension pocketed by the 17,471 retired eurocrats benefiting from the scheme is £57,194, while the highest ranking officials can pocket pensions of over £102,000.

Our second story comes from the Cayman Islands, where bureaucrats (as well as some politicians) have figured out the double-dipping scam, getting a lucrative pension while still receiving a salary. But the Cayman Islands at least deserve credit for limiting the damage. All bureaucrats hired after 1999 participate in a mandatory savings system, thus limiting the long-run risk for taxpayers.

A significant number of employees in the Cayman Islands Civil Service receive a monthly pension as well as a salary, according to records obtained by the Caymanian Compass. There are 65 people who have retired from the civil service under the defined benefit pension programme – which means they are receiving a monthly pension while continuing to work in government, according to information from a Freedom of Information request made by the Compass. Those workers are typically employed on a fixed-term contract and, therefore, also receive a salary. …There were 171 employees working in the civil service who were age 60 or over at the date the Compass made its open records request. The ability of civil servants and Cayman Islands legislators to ‘double dip’ is not to the liking of at least one lawmaker, who raised the issue in the Legislative Assembly in June. North Side MLA Ezzard Miller told the assembly that a change in the parliamentary pensions law in recent years has allowed elected officials to receive the same benefit as civil servants – to retire while continuing to serve in the assembly. In essence, Mr. Miller said, those lawmakers can “get a double dip” – continue to receive their salaries while earning a pension at the same time. …Cayman Islands civil servants who joined the service after mid-April 1999 no longer receive defined benefit pension payments. In other words, the newer civil service employees will receive a lump sum payment from their pension funds rather than a monthly pension.

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For those who favor truth in labeling, the housing meltdown and related financial crisis and economic downturn should be brightly stamped with the phrase, “Made in Washington.” Here are two good pieces of evidence. First, this paper from the American Enterprise Institute is one of the best big-picture analyses on the issue. It identifies how “affordable lending” policies are at the heart of the problem. Here’s an excerpt from the abstract.

Government policies forced a systematic industry-wide loosening of underwriting standards in an effort to promote affordable housing. This paper documents how policies over a period of decades were responsible for causing a material increase in homeowner leverage through the use of low or no down payments, increased debt ratios, no loan amortization, low credit scores and other weakened underwriting standards associated with NTMs. These policies were legislated by Congress, promoted by HUD and other regulators responsible for their enforcement, and broadly adopted by Fannie Mae and Freddie Mac (the GSEs) and the much of the rest mortgage finance industry by the early 2000s. Federal policies also promoted the growth of overleveraged loan funding institutions, led by the GSEs, along with highly leveraged private mortgage backed securities and structured finance transactions. HUD’s policy of continually and disproportionately increasing the GSEs’ goals for low- and very-low income borrowers led to further loosening of lending standards causing most industry participants to reach further down the demand curve and originate even more NTMs. As prices rose at a faster pace, an affordability gap developed, leading to further increases in leverage and home prices. Once the price boom slowed, loan defaults on NTMs quickly increased leading to a freeze-up of the private MBS market. A broad collapse of home prices followed.

Then, to show a good example of Mitchell’s Law, which is how bad government policy leads to more government policy, here’s a story about the fiasco surrounding President Obama’s mortgage subsidy program. The government is so bloody incompetent, it can’t even give away money effectively.

Nearly half of the 1.3 million homeowners who enrolled in the Obama administration’s flagship mortgage-relief program have fallen out. The program is intended to help those at risk of foreclosure by lowering their monthly mortgage payments. Friday’s report from the Treasury Department suggests the $75 billion government effort is failing to slow the tide of foreclosures in the United States, economists say. More than 2.3 million homes have been repossessed by lenders since the recession began in December 2007, according to foreclosure listing service RealtyTrac Inc. Economists expect the number of foreclosures to grow well into next year. “The government program as currently structured is petering out. It is taking in fewer homeowners, more are dropping out and fewer people are ending up in permanent modifications,” said Mark Zandi, chief economist at Moody’s Analytics. …Many borrowers have complained that the government program is a bureaucratic nightmare. They say banks often lose their documents and then claim borrowers did not send back the necessary paperwork. The banking industry said borrowers weren’t sending back their paperwork. They also have accused the Obama administration of initially pressuring them to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out. Obama officials dispute that they pressured banks. They have defended the program, saying lenders are making more significant cuts to borrowers’ monthly payments than before the program was launched. And some of the largest mortgage companies in the program have offered alternative programs to those who fell out.

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I ran across two interesting lists showing how politicians at the state and local level are often just as bad as the ones in Washington, DC. First, Forbes has an article identifying the 10 states with the highest income tax rates. The top rate is a big deterrent to entrepreneurs and investors, but it’s also important to look at the income level where the top tax rate takes effect. Yes, Hawaii, Oregon, and California have terrible tax policy, but Iowa, Maine, and Washington, DC, deserve special scorn for raping the middle class.

Hawaii:                       11% (income over $400,000 (couple), $200,000 (single))
Oregon:                      11% (income over $500,000 (couple), $250,000 (single))
California:                   10.55% (income over $1 million)
Rhode Island:             9.9% (income over $373,650)
Iowa:                          8.98% (income over $64,261)
New Jersey                 8.97% (income over $500,000)
New York:                   8.97% (income over $500,000)
Vermont:                     8.95% (income over $373,650)
Maine:                        8.5% (income over $39,549 (couple), $19,749 (single))
Washington, D.C.:      8.5% (income over $40,000)

Looking at the other major source of revenue for state and local governments, the Tax Foundation identifies the cities with the highest total sales tax rate - a number that often includes three separate levies by state, county, and city governments. Here are the top 10. Or should I say worst 10?

Birmingham AL              10.000%
Montgomery AL             10.000%
Long Beach CA                9.750%
Los Angeles CA               9.750%
Oakland CA                    9.750%
Fremont CA                     9.750%
Chicago IL                     9.750%
Glendale AZ                    9.600%
Seattle WA                     9.500%
San Francisco CA           9.500%

One thing that stands out is that California is on both lists, which helps explain why the state is such a basket case. Seattle deserves a special mention because at least there is no state income tax in Washington.

Last but not least, it’s worth mentioning that there’s no sales tax or income tax in New Hampshire. Live Free or Die!

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The title of this post is tongue-in-cheek, but the Obama presidency certainly has sparked a resurgence in the limited-government movement. Professor John J. Pitney, Jr., explores this issue for Reason TV.

I actually wanted Obama to win in 2008 for precisely this reason. Yes, Obama is giving us bigger government, but a McCain victory also would have meant bigger government. Some people will argue, quite correctly, that we wouldn’t have been saddled with Obamacare if McCain had won. My response is that McCain’s healthcare plan also was bad, and surely would have become even worse as it meandered through a legislative process controlled by Harry Reid and Nancy Pelosi. Moreover, cap-n-trade and a value-added tax would have been much more likely under a McCain Administration.

With Obama in the White House, the free-market movement is enjoying a renaissance. That would not have happened under a McCain Administration. Moreover, Republicans on Capitol Hill are at least pretending they now believe in small government. That’s only happening because Obama is in the White House.

In short, a McCain victory would have meant continued growth of government with no prospect of a conservative/libertarian renewal. Obama’s victory has been giving us bad policy, of course, but at least there’s now a backlash for freedom.

For what it’s worth, I’ve always been a fan of this one-step-backwards-two-steps-forward strategy. I wanted Carter to win in 1976, Clinton to win in 1992, and Kerry to win in 2004. If we’re going to have someone in the White House who is doing the wrong thing, it’s better for it to be a Democrat. After all, Carter paved the way for Reagan in 1980 and Clinton set the stage for the 1994 GOP revolution. I suspect something equally interesting will happen this November.

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National Review captures a key difference between Reagan and Obama, writing that Reagan was willing to incur short-run political pain to make America healthier and stronger.  Obama, by contrast, has pursued the free-lunch Keynesian approach. Only time will tell whether Obama becomes another Jimmy Carter, but he certainly isn’t doing himself any favors by continuously pushing to expand the burden of government.

Both men faced seemingly intractable economic problems with no easy solution, but Reagan understood that curing the nation’s debilitating inflation was going to involve a good deal of short-term economic pain and political unpopularity, and he was prepared to endure that. By contrast, Obama has done everything in his power to avoid painful corrections — at great cost to future taxpayers.  It is increasingly evident that his policies have merely put off these corrections or dragged them out, and that we have not avoided them at all. Reagan’s willingness to accept painful and unpopular but necessary economic adjustments — and Obama’s lack of the same fortitude — is the essence of what separates the two men. …The blowback that resulted from Volcker’s decision to put the economy into a coma was swift and severe. The sharp recession that ensued once Volcker started shrinking the money supply prompted Democrats and Republicans alike to introduce legislation to rein in the Fed. But Reagan refused to back any such action or even criticize Volcker in public. In private, Reagan was candid about what needed to be done, according to the late Bob Novak’s reporting on the subject: “I’m afraid this country is just going to have to suffer two, three years of hard times to pay for the [inflationary] binge we’ve been on,” Reagan said. It is impossible to imagine Obama speaking such unpopular truths in public or in private after having so often expressed the opinion that a massive debt-fueled government-spending program would create millions of jobs and reconstruct an economy torn asunder by years of binging on debt. …his unpopular moves laid the groundwork for three decades of unprecedented economic expansion. So far, we have seen no evidence that Obama’s unpopular policies will pay those kinds of dividends. Like Reagan, Obama inherited an economy with structural problems requiring painful adjustments. Unlike Reagan, he has tried to put off those adjustments or cover them up with feel-good stimulus programs. Reaganomics worked. Obamanomics? Let’s just say it will be interesting to see how much longer those trend lines overlap.

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