Feeds:
Posts
Comments

Archive for March 2nd, 2011

Earlier this week, the Washington Post predictably gave some publicity to the Keynesian analysis of Mark Zandi, even though his track record is worse than a sports analyst who every year predicts a Super Bowl for the Detroit Lions. The story also cited similar predictions by the politically connected folks at Goldman Sachs.

Zandi, an architect of the 2009 stimulus package who has advised both political parties, predicts that the GOP package would reduce economic growth by 0.5 percentage points this year, and by 0.2 percentage points in 2012, resulting in 700,000 fewer jobs by the end of next year. His report comes on the heels of a similar analysis last week by the investment bank Goldman Sachs, which predicted that the Republican spending cuts would cause even greater damage to the economy, slowing growth by as much as 2 percentage points in the second and third quarters of this year.

Republicans understandably wanted to discredit this analysis. But rather than expose Zandi’s laughably inaccurate track record, they asked the Chairman of the Federal Reserve, Ben Bernanke, for his assessment. But this is like asking Alex Rodriguez to comment on Derek Jeter’s prediction that the Yankees will win the World Series.

Not surprisingly, as reported by McClatchy, Bernanke endorsed the notion that spending cuts (actually, just tiny reductions in planned increases) would be “contractionary.”

Bernanke was asked repeatedly about GOP proposals to trim anywhere from $60 billion to $100 billion in government spending during the current fiscal year, which ends Sept. 30. These cuts would do little to bring down long-term budget deficits but would slow the economic recovery, he cautioned. “That would be ‘contractionary’ to some extent,” Bernanke said, projecting that “several tenths” of a percentage point would be shaved off of growth, and it would mean fewer jobs. …While Democrats got what they wanted out of Bernanke with that answer, he frowned on some of their projections that the spending cuts that are being debated could reduce growth by a full 2 percentage points.

Since he is not a fool, Bernanke was careful not to embrace the absurd predictions made by Zandi and Goldman Sachs. But that’s merely a difference of degree. Bernanke’s embrace of Keynesian economics is disgraceful because he should know better. And his endorsement of deficit reduction (at least in the long run) is stained by crocodile tears since Bernanke supported bailouts and endorsed Obama’s failed stimulus.

But while Bernanke is not a fool, I can’t say the same thing about Republicans. Bernanke has made clear that he either believes in the perpetual-motion machine of Keynesianism, or he’s willing to endorse Keynesian policies to curry favor with the White House. Republicans should be exposing these flaws, not treating Bernanke likes he’s some sort of Oracle.

Read Full Post »

A large number of Democrats voted with Republicans in the House yesterday to pass a two-week spending bill that includes $4 billion in cuts compared to what Obama requested. This is a modest victory for the GOP since they can truthfully claim that they are on target to impose the equivalent of $100 billion of cuts over a full fiscal year.

And it appears the Senate will go along with the House proposal, as reported today by the Washington Post.

The deal, which eliminates dozens of earmarks and a handful of little-known programs that President Obama has identified as unnecessary, sailed through the House on a 335 to 91 vote. Senate Majority Leader Harry M. Reid (D-Nev.), who initially resisted including any cuts in a short-term funding extension, predicted that it will pass that chamber as early as Wednesday.

Some people correctly note that a $4 billion cut is trivial since government spending has ballooned by $2 trillion during the Bush-Obama spending binge – especially since at least some of the supposed spending cut is based on the dishonest Washington practice of measuring “cuts” on the basis of how much Obama wanted to spend rather than nominal changes from one year to the next. Nonetheless, it is a very positive development that the conversation has shifted from “how much should spending be increased?” to “how much should spending be cut?”

That being said, the battle is far from over. Indeed, the GOP began the 1995 shutdown fight in good shape. As I explained in a recent National Review article, a significant number of congressional Democrats sided with Republicans and it appeared that Clinton was on the defensive.

But GOPers ultimately did not get everything they wanted that year, in part because Clinton and the Democrats were able to regroup when the government was temporarily re-opened for a three-week period. Democrats today presumably view the current two-week agreement as a similar opportunity to make a short-term tactical retreat in hopes of winning bigger battles in the future (not just the fight over FY2011 spending levels, but also the upcoming FY2012 budget resolution debate and the debt limit conflict in June or July).

In other words, Republicans should be very careful about having their energy dissipated by a series of diversionary battles over short-run spending bills. At the very least, they need to insist that all such bills include pro-rated spending cuts to fulfill their promise of reducing Obama’s request by $100 billion.

At some point, perhaps when the two-week agreement expires, Democrats will balk at that tiny level of fiscal discipline. And if Republicans also hold firm, this means a government shutdown. Obama and Reid will imply this is somehow the fault of the GOP, but the Washington Post story suggests that recycling the 1995 strategy may not be very successful for the left.

Republicans bore the brunt of the blame that time. A Washington Post poll released this week suggested that this time, voters would apportion fault about equally to both parties. What has changed? The state of the economy is far more precarious than it was in the mid-1990s, the deficit is 10 times as large, and the public’s confidence in elected officials is even lower. …But if the politics of a shutdown are in many ways more treacherous than they were in 1995, the actual effects of one would probably be less disruptive. Indeed, so many things have now been declared essential services that the government might “shut down” without most Americans noticing much difference. As happened in 1995, air traffic controllers would still watch the skies. And a wider swath of military, diplomatic and national security personnel would stay on the job to deal with concerns in a post-9/11 world. …Therein lies the paradox under all the talk of a shutdown. Privately, some Democrats say they fear that a closure that barely affects the daily lives of most Americans could bolster conservatives’ argument that much of what the government does is unnecessary.

The final sentence of this excerpt is key. Would anybody (other than interest groups with snouts in federal trough) notice or care if the Department of Housing and Urban Development was shut down? Is anybody going to lose sleep if the Department of Energy is in hibernation?

In other words, a “government shutdown” would reveal that most of the “non-essential” parts of government are not necessary in the short run or the long run.

This is why Republicans, if they are reasonably astute, hold the upper hand in the current negotiations. They should speak softly and sound reasonable, but carry the big stick of a shutdown in order to ensure that the spending cut target for FY2011 spending is not eroded. And if they prevail, that will have a very positive carryover effect on the looming fights on the FY2012 budget resolution as well as the debt limit.

One final comment about the Washington Post report. The story asserts, in the excerpt below, that Clinton had fiscal credibility because he imposed a tax increase in 1993. But as I have already explained, that tax increase was a miserable failure and even Clinton’s own OMB forecast, made 18 months after the tax increase was adopted, showed permanent deficits of more than $200 billion.

Obama, who has overseen an expansion in spending, does not have the fiscal credibility that helped give President Bill Clinton the winning political hand in 1995 and 1996. Clinton invested significant political capital in reducing the deficit, first by passing his 1993 economic package, which included tax increases.

Read Full Post »

Follow

Get every new post delivered to your Inbox.

Join 2,414 other followers

%d bloggers like this: