The major headlines on Saturday, August 6, 2011, contained no surprises in announcing that Standard & Poor’s had downgraded the United States credit rating from AAA to AA+. That decision, of course, had this rich irony: the same credit agency that was lambasted for giving rosy ratings to toxic mortgage-backed securities is now being skewered, especially by liberals like Paul Krugman and the New York Times, for selling the United States short. The markets, however, did not react with the same skepticism toward the S&P as the committed liberals did. Inexorable and impersonal, the stock markets were 5.5 percent on Monday. The days of indifference to deficits have come to a close.
Illustration by Barbara Kelley
What clearly drove the S&P downgrade, and may yet drive other ratings agencies like Fitch and Moody’s to the same conclusion, is that this nation’s leaders and its restive public have yet to agree on a common solution to our debt crisis. In a sense, the S&P downgrade was a trailing indicator of the dismal prospects for sustained growth. The 512-point Dow nosedive on Thursday August 4, before the S&P ratings hit, had already sent the same message.
The main reason why the markets and the S&P moved in harmony stems from their recognition that last week’s disappointing debt compromise—with its puny $2.1 trillion in projected cuts—did not make a dent in the projected $40 trillion shortfall of our entitlement programs. Nor has it led to any national consensus on how, or indeed whether, to trim the debt. Sunday’s New York Times editorial offered its own predictable recommendations, noting with smug satisfaction that a NYT/CBS poll finds that "63 percent [of Americans] support raising taxes on households that earn more than $250,000 a year to help address the deficit." The punch line is that the fickle public has so rejected the Tea Party verities of the midterm elections that it now embraces some version of Obama’s tax–and-spend policies.
In light of all these grim developments, my libertarian worldview is not likely to be enacted into law anytime soon. Luckily, the folks at S&P do not require a majority vote to lower the United States credit rating. They may have been amused by the constant drumbeat from the likes of House Minority Leader Nancy Pelosi that the time has come to turn our attention from deficits to jobs, as if the creation of larger deficits will do anything to stop the bleeding job market. The way the Obama administration sees it, if the private firms continue to inexplicably sit on their mountains of cash, the government has to intervene with yet another failed stimulus program.
The disconnect between the debt crisis and the Obama administration was made clear by a recent announcement from Secretary of Health and Human Services Kathleen Sebelius: the Obama administration, acting under the Patient Protection and Affordable Care Act, has created yet another new entitlement that requires insurers to provide women with contraceptive services for free.
The clear lesson to the S&P analysts is that entitlement spending remains on autopilot.
The clear lesson to the S&P folks is that entitlement spending, which was immunized from the debt ceiling compromise, remains on autopilot. No matter how much discretionary spending is curtailed, the revenue situation will only get worse if entitlements continue to rise, which they will unless meaningful regulatory reform takes place pronto. Yet that cannot happen as long as the Democrats keep control of the Senate and the White House.
So what should be done? On this occasion, I want to look beyond the debt, taxation, and expenditure debate to address other ways in which to remove some of the fetters that have limited economic growth. On this point, I think it is wise to return to some issues that were relevant in the run-up to the 2010-midterm elections. My fear then was that the no matter what the outcome of the midterm elections, the Obama administration would remain committed to the same four great vices of political statecraft that defined its first two years of governance, and that have left the economy in shambles.
These vices are (1) supporting high marginal rates of taxation, (2) backing labor unions through thick and thin, (3) being hostile to international free trade, and (4) championing, in good Progressive form, the full range of positive rights to health care and housing. Here is a thumbnail sketch as to why the president goes wrong on each of these.
High marginal tax rates
The Democrats’ fixation with high marginal tax rates does not fix what ails the tax system. Right now, tax revenues are low relative to GDP, but that derives from the decision to insulate about 50 percent of the public from the income tax, which has the unfortunate political consequence of inducing them to support government programs from which they benefit, but for which they do not pay.
Yet another problem with the high marginal tax rate agenda is that it presupposes that money now in the hands of gifted private individuals will be better spent or managed in the hands of the government. Yet we see from the dismal failure of the stimulus programs that this claim is false.
One vivid illustration of stimulus folly comes from the small town of Bridgman, Michigan. The town was the recipient of stimulus money that was used on infrastructure improvements. The old traffic light at the corner of Lake Street and Red Arrow Highway needed only five separate signal lights on a single wire to regulate the flow traffic in all directions. Too simple for a failing economy, the shiny new system now has four grand connecting arches, each of which supports three traffic lights, coupled with other regalia. As an added bonus, the new installation program ripped out sidewalks and curbs, to replace them with fake brickwork and old-fashioned streetlights. The major achievement of this upgrade was to block entry into the struggling stores on the main streets, depressing trade.
Going further into debt won’t create jobs. On the contrary, controlling debt will lead to more jobs.
Imagine such "stimulus" repeated thousands of times across the country. The sad truth is that it is just as easy to waste money on infrastructure as it is on anything else, like entitlements. We need to finally admit that the old stimulus saw does not work. Going further into debt won’t create jobs in the future any more than it did in the past. On the contrary, all other things equal,controlling debt will lead to more jobs. It is therefore a form of economic suicide to embrace yet another stimulus program on the vague hope that it will miraculously succeed, even though it has already failed at least two or three times in the past.
Fealty to unions
The president’s uncritical support of the union agenda is a job killer of the first order. As a matter of simple economics, labor unions are inefficient monopolies that can only succeed by raising wages, lowering employment levels, and knocking out cheaper nonunion competition to maintain their positions. They also demand work rules that impose a further drag on the economy.
Unions cannot succeed at the bargaining table under the current statutory system. Too many workers realize that the higher wages that unions promise carry with them a high price tag. Dues are high, strikes are costly, and nonunion competition can force retrenchment or bankruptcy on newly unionized firms.
So unions now move in other directions to assert their power. They fight nonunion employers before zoning boards and building commissions. They harass firms that won’t yield to their demands by calling in public inspectors. They choke off the flow of imported goods made with cheaper foreign labor. They seek presidential favors. They prevail on the administration to hound private companies, like Boeing as it tries to build its new South Carolina plant. They support rich health mandates for private firms. And the list goes on.
The economy will continue to stagnate, with slow declines in the standard of living for all Americans.
These actions cost money and they are all counterproductive. The unwillingness of private employers to hire is not so inexplicable given the hostile labor law environment. Labor contracts only take place when the gains from trade exceed the costs of putting deals together. The Obama administration’s specializes in raising the costs of hiring while reducing the gains from those new hires. If it reversed both policies by ditching its union allies, then the labor markets would start to come back to life.
International free trade
The Obama administration’s official position is that it is in favor of free trade. Now comes the inevitable "but." That free trade has to be "fair" as well. It must respect the rights of labor unions abroad, and take a close look at environmental practices overseas. The upshot is that the exceptions overwhelm the rule, so that no new free trade agreements are struck, in part to appease the president’s big labor constituency.
It takes zero federal dollars (but real political will) to remove obstacles to trade, which will stimulate both imports and exports and could lead to real growth that might put a dent in the deficit. But once again, the Obama administration and its Democratic supporters take a line that should leave every credit rating agency and every citizen apoplectic. First, the administration erects trade barriers to shrink the economy. Second, it uses transfer payments to shrink it more.
In a well-designed polity, the state should concentrate on enforcing a limited set of rights. It protects people against force, fraud, and monopoly, and it enforces private contracts that lead to gains from trade. It stays out of the business of supplying housing, education, and health care, which it does neither equitably nor well.
But the president’s health care act is one of many pieces of legislation that violates this norm by casting government into the center of an elaborate network of regulations likely to topple under their own weight. Getting out of this morass is not just a question of fine-tuning the presently overregulated health care system. What is needed is a deep awareness that constant political pressures on health care, housing, and education—combined with the slow and erratic response time of even the best public officials—cannot keep up with consumer demand and technological innovation. Ever.
Since the 1960s, we have run two large programs, Medicare and Medicaid, which have verified these predictions, as their costs have skyrocketed and finances have crumbled. It is devilishly difficult to unwind entitlement programs that transfer huge sums to people who are too old or infirm to fend for themselves. But it is utter foolishness to replicate anew the same flawed strategy on a grand canvas after it has failed with two major programs that are likely to implode within the next five to ten years.
Taking everything together, we have a truly a sorry situation before us. In my view, S&P was right to downgrade U.S. debt. The market is making the right call as well. It will not plummet. Rather, owing to the administration’s current intransigence, the economy will continue to stagnate, with slow declines in the standard of living for all Americans. The solution requires a real change in course, marked by a return to the classical liberal synthesis of strong property rights, low and flat taxes, and small government that keeps a close eye on tax expenditures.
Clearly this position does not resonate with a majority of the American public. It will take a real political leader to change our direction. As bad as the Obama’s policies are, no Republican presidential nominee has come close to articulating a comprehensive vision for our fiscal future. The odds are not good that such a candidate will emerge in the run up to the 2012 election.
In labor unions, there are public and private markets. The stabilizing public market has a direct impact on the size of government--federal and local. The methods of taming this market are not clear; however, the number of employees in the public sector is definitely declining. Private unions are almost dead from a historical perspective. If anything, they should be kept alive. Unions, as a concept, are useful. They could come in handy in a future unforeseen crisis. They should not be abolished.
Free trade in the environment of rising China is dicey at best. Predicting how South Korea, Panama, and Colombia will act requires more than a crystal ball. Each nation does what is best for its interests--whether that means cooperating with and/or defying U.S. interests. Setting permanent trade models for the rest of the countries on the “most favorite nations list” or meddling with the “fast track” deserves flexibility on our part.
It is unimaginable to think that the greatest minds (elites) can just dictate how this country runs. That goes totally against the principle of democracy. Educate the public. Influence the public. Americans are a lot smarter than they credit get credit for. Most are just busy living their daily lives to fullest. But they always come together to do the right thing.