About that sequester…

One of the amber-encased pieces of conventional wisdom regarding the sequester is that the Administration has no room to maneuver on what spending it can reduce. The sequester demands across-the-board, so it gets across-the-board, supposedly.

Byron York (DC Examiner) explains how that is completely untrue:

Congress tells executive branch agencies how much money they can spend and how they should spend it. Sometimes the instructions are broad, and sometimes they are quite detailed. Cabinet secretaries and lower-downs are bound to work within those congressional directives.

But if Cabinet officers want to spend the money differently, there is a long-established process for doing so: They ask Congress for permission. It happens all the time, with lawmakers routinely giving the executive branch the OK to spend money in different ways than originally planned.

That could be happening now. All those Obama administration officials complaining about across-the-board cuts dictated by sequestration could come up with plans to make the same amount of cuts in ways that would create fewer problems for federal workers and services. Then they could ask Congress for permission to do so. Lawmakers would say yes, and things would be fine.

But it’s not happening. And the fault is not with Congress.

In recent weeks, House Republicans have been virtually begging administration officials to ask for permission to move money around. If one program could be more easily cut than others, those Republicans say, just ask us, and we’ll let you do it.

“We sent out on Feb. 28 a letter to every Cabinet officer asking them what changes they’d like to have — pluses, subtractions and so on — to give them an opportunity to show us at least one program they would like to have cut, which would then save on sequestration,” Rep. Darrell Issa, chairman of the House Committee on Oversight and Government Reform, said in an interview Tuesday night. “We did not receive a single answer.”

In other words, any federal department that wanted to prioritize funding during the sequester could have asked Congress to let them do it. In fact, they still can. They’re just choosing not to do so. Congressional Committee chairs have even asked the Departments why they haven’t come forward asking for the authority to move money around in order to protect what they (the Departments) think are vital programs. The Education Department responded: “The wheels are turning.” This is the same Education Department that claimed the sequester would lead to teacher firings…

The last quote from Chairman Issa says it all: “If you find programs that you can cut altogether or programs that you can combine, the authority for it would be only hours away.”

Yet the Administration that can scream bloody murder to any camera in sight…has no answer for Congress.

Maddening.

The President, the deficit, and Keynesian theory

During last week’s scare session on the sequester, the president said something very revealing about himself (via Peter Kirsanow):

Lay offs and pay cuts means (sic) that people will have less money to spend at local businesses. That means lower profits. That means fewer hires. So every time that we get a piece of economic news over the next month, next two months, next six months, or as long as the sequester’s in place, we’ll know that that news could have been better if congress had not failed to act. (Emphasis added.)

This paragraph reveals, in a nut shell, how the president sees the economy. “Local businesses” don’t make decisions on their own. Their “profits” and “hires” are driven solely by consumer demand, and nothing more. This is known as the Keynesian school of economics. Under the Keynesian theory, the economy is driven entirely by what consumers, businesses, and government spend (otherwise known as aggregate demand). In particular, government spending benefits the economy through purchases and hires, with that money rippling through the economy multiple times over (in fact, the measure of this rippling is called the “multiplier effect”). The more direct the spending is, the larger the effect.

This last part is critical to the Keynesian theory, because it explains Keynesian politics. For Keynesians, government spending is always better than consumer spending (because consumers save some, that money “leaks” out of the economy). Thus, tax cuts, which under the Keynesian school effects only consumption, is never better than government spending. Likewise, tax increases are always less damaging than spending cuts. Thus, Keynesian adherents are drawn towards permanently growing government, and an ever expanding tax burden.

Of course, there is much that Keynesian theory completely ignores – such as the incentives firms face when they choose to do business. Because Keynes himself was rebelling against a pre-Depression “Walrasian” consensus, he ignored much of the microeconomic theory regarding how businesses respond to costs. Due to this, there are no impediments to production in the Keynesian world; it reacts to demand, period.

As one might expect, Keynesian theory had no response to the events of the 1970s, where dramatic increases in resource costs had dramatic effects on business production (a.k.a., aggregate supply). It was to bridge this dramatic gap in economic theory that the “supply-side” school was born. Supply-siders focused on uncertainty, taxes, regulations, and other cost to businesses, and how they impact both production decisions at the microeconomic level and growth at the macroeconomic level.

In short, the taxes that Keynesians felt were least troubling (income and investment taxes, because they do not affect consumption directly) were exactly the ones supply-siders found most troubling (because they reduced the incentives to provide capital to business, and thus increased business costs of financing). Other taxes and regulations that would impact mainly firms were of great concern to supply-siders, but largely thought benign by Keynesians.

In short, the economic arguments that divide the two parties are largely driven by these differences in economic views. Naturally, the government-friendly Democrats move more towards Keynesianism, while business-friendly Republicans drift closer to supply-siders.

Moreover, this explains, at least in part, the president’s insistence on new tax hikes despite the old tax hikes only coming two months earlier. For this president, tax hikes are always better than spending cuts.

It’s not about cynical politics or tactics (or, to be precise, not just those); the president really believes this stuff.

The gory details on the tax hike “compromise” (UPDATED)

The numbers are out on the conference committee’s tax hike plan…and if anything, it’s worse than we thought.

For starters, the plan raises taxes by $682 million annually (once fully implemented) at the state level for transportation, and by another $135.5 million for other stuff. That’s over $817 million in tax hikes, just from Richmond alone.

Moreover, the plan also gives localities in Northern Virginia and Hampton Roads the “option” of raising taxes by a total of $475-$550 million annually. UPDATE: The local tax hikes include a 1% sales tax, an increase in the grantor’s tax (that’s right, they’re taxing real estate sales as we’re still trying to recover from the housing slump), and a hotel occupancy tax (which will hit business travel).

I should note that just about every previous “local option” tax increase package has included the financial version of a gun to the head of localities to force them to enact them. I don’t have the language of the conference committee version, so I can’t say for certain if this one includes it, too. That said, odds are the localities will knuckle under, meaning the annual tax increase is likely to be roughly $1.3 billion annually.

Not even Grover Norquist thought it was that high at first.

Yet even that isn’t enough for folks like the Northern Virginia Transportation Alliance, whose leader is looking forward to “being able to build on this in the future” (Washington Post).

In fact, Virginia stands at a crossroads (especially Virginia Republicans). Do we simply shrug our shoulders and do what is easy (raise taxes with the premise that we can do it again)? Or do we recognize the economic damage that would be done by a tax increase, roll up our sleeves, and take a cold, long, hard look at the Virginia budget to determine what is not as high a priority as transportation (as well as determining within transportation what should be a state function and what shouldn’t)?

The House has this tax increase (known as HB2313) on their calendar today. There is still enough time to stop it, enough time for state leaders who have currently been silent – are you reading this, Mr. Cuccinelli? – to stand up for the taxpayer and make themselves heard. UPDATE: Ken has put out a confused statement approving of “localities…given more authority” but opposing tax increases. Given that the bill disguises the latter as the former, I’m not sure where Ken lands on this.

It looks like Virginians’ taxes will go up

The word from the Washington Post is that the conferees in the Virginia Legislature our moving closer to a deal. How close to McDonnell’s tax hike or Frank Wagner’s tax hike is not known.

What is known is that Virginia taxpayer is about to suffer the consequences of Republicans and Democrats working together (previous disasters from bipartisanship: an ethanol policy that nearly starved the world of grain, TARP, the federal tax increase of 2013, and apparently the state tax increase of 2013).

McDonnell’s tax increase in Senate Finance Committee today

HB2313 – a.k.a., Governor McDonnell’s tax increase – is on the agenda for the Senate Finance Committee today; for all I know, it has already been sent to the Senate floor…

…but in case it hasn’t, for the uninitiated….

• McDonnell’s plan is a tax increase
• State Senator Newman’s alternative (backed, sadly, by Ken Cuccinelli) is also a tax increase, albeit a smaller one
• The Democrats are demanding tax increases of at least $1.2 billion a year

In response, true friends of the Virginia taxpayer can do one of two things:

• Include an income tax reduction large enough to make either McDonnell or Newman’s plan a net tax cut, or…
• Oppose both plans (and whatever specific tax hike the Democrats have in mind)

We’ll see what the Senate Finance Committee does (or has done)…

Howell’s death-blow to Senate redistricting clears way for tax hike

One can argue on the merits and optics of the State Senate GOP’s redistricting move last month, but Dick Saslaw made one thing clear to the Washington Examiner, with Speaker Howell killing the proposed lines, a tax increase is now a certainty.

Senate Minority Leader Dick Saslaw, D-Springfield, indicated that negotiations over transportation between the GOP and Democrats will be much smoother now.

“We’ll get things worked out,” Saslaw said.

…and taxpayers will get worked over…

My reaction to the fiscal cliff debacle: the GOP caved, and will again

So while I was on vacation, the Republicans did what I expected them to do in the “fiscal cliff deal” – they caved.

They did not attempt to explain why tax increases are a bad idea. Instead, they tried to minimize the damage as much as they could, and yet even in doing that they have managed to make things worse.

It is now abundantly clear that the Republicans in Washington are terrified only of being “blamed” when the plans for ever-larger government goes off the rails. They will have the same fear – and thus cave in the same manner – when the debt-limit and sequestration debates arise over the next two months.

Meanwhile, the president – having gotten a deal that reduces 10 cents in spending for every dollar in projected revenue increases (One News Page) – keep in mind that the actual revenue raised will be smaller, most likely far smaller – is demanding even higher taxes (Forbes).

From a national perspective, it is difficult not to demand a new party on the right to replace the Republicans.

Yet locally, it is a very different story. The entire Republican delegations in Virginia and Maryland voted against this debacle (House Vote). Even recently defeated Congressman Rob Bartlett voted no. Given that in Virginia, the number of Republican Congressmen is eight (to Maryland’s two), this is a much bigger deal south of the Potomac. It shows there may yet be a future for conservatives in the GOP in the Old Dominion.

Cross-posted to Virginia Virtucon

It really is Bush’s fault, Part 1: the temporary tax cuts

The 2012 election has led, in theory, to a large amount of “soul-searching” in the Republican Party. However, one datum from the electorate that has largely been unaddressed is the fact that a majority of voters still blamed former President George W. Bush for the current state of the economy than his successor. After a review of the economic situation over the last dozen years, I have come to the conclusion that the majority is correct, although my reasons for it are likely not theirs. This series will cover how I believe the former President earned the blame. I should note that I will only deal with economic policy here.

First and foremost, it is now clear that Bush the Younger’s strategy for reducing taxes in 2001 and 2003 – bigger, but time-limited, over smaller and permanent – was a mistake.

For much of the last four decades, argument over economics have been between Keynesians – those who believe aggregate demand for economic output (consumption, business purchases, and government spending) is the dominant force in the American economy – and, for lack of a better term, anti-Keynesians – who recognize numerous other factors, most affecting production. Monetarists focus on the dangers of uncertainty, the Rational Expectations school zeroes in on reactions and expectations of consumers and businesses, and Supply-siders emphasize the costs to businesses caused by government (taxes and regulations in particular).

The fact of the matter is this: from an anti-Keynesian perspective – any anti-Keynesian perspective – temporary tax cuts are a disaster. They add uncertainty, fuel expectations of a future tax increases (once the reductions expire), and do little to the long-run costs businesses must endure to operate and expand – and in fact can add unproductive costs for time-phased tax avoidance. This is why the last temporary tax policy of any kind prior to 2001 was imposed during the 1970s, before anti-Keynesianism grew into the umbrella of ideas that it has become.

As a result, Bush the Younger’s tax reductions were drained of any supply-side effects, and were simply much larger versions of Keynesian temporary tax cuts from earlier times. The result was as expected – an inflationary expansion fueled by higher prices in resources (including land – hence the housing bubble) and vast increases in consumer debt to pay for it all.

Looking back, it would have been better to reach out to the Democrats to see if they would accept smaller, but permanent, tax reductions. Instead, we now have reductions about to expire, and massive budget deficits fueled in no small part on the possibility of those very tax cuts expiring (and thus recovering large amounts of revenue).

In short, we got the disadvantages of higher tax rates (on the economy, and on the impulse of Washington to spend) without that actual revenue from them: literally the worst of all worlds.

Looking forward, it is all but certain that the Republicans currently in Washington will cave on the president’s demand for higher tax rates. I would prefer that they didn’t – in fact, I find any kind of tax increases to be a bad idea – but to some extent this was inevitable the moment Bush the Younger and the Republicans in Congress decided to make the 2001 and 2003 tax cuts temporary rather than spend the political capital needed to make them permanent and/or find accommodation with the Democrats for a smaller yet permanent reduction.

A Republican Party that so thoroughly lacks the courage of its convictions is in need of a far deeper overhaul than anyone is considering right now – or simple replacement.

Cross-posted to Virginia Virtucon

Meanwhile, in New York City, interest rises in … the Republican nomination for Mayor

Reports of the death of the Republican Party (and it should be noted that even yours truly speculated about terminal illness) might well be exaggerated. We certainly know that New York City never got that memo.

Less than a week after the president’s re-election (with talk of ethnic minorities empowering Democrats to a permanent majority ringing in everyone’s ears), New York (where whites themselves have been a minority since 1990) saw Adolfo Carrion – former Bronx Borough President and former Obama Administration official – declare himself a former Democrat, in order to run for Mayor of New York as the Republican nominee (New York Daily News). Carrion followed that up with a call for taxpayer funds for campaigns (a Big Apple staple since Ed Koch) to be junked (New York Post – just under the speculation about a Cuomo appointee being lobbied to run for Mayor as a Republican).

What gives?

Well, for starters, the Republican nominee has been elected Mayor of New York each of the last five elections (1993, 1997, 2001, 2005, 2009). Moreover, one does not have to be a registered Republican to run on the Republican line (although one cannot be a Democrat). Mayor Bloomberg himself was “unaffiliated” when he won the Republican nomination in 2009 (he was a Republican in 2001 and 2005).

However, it does say something that a politician in New York – in a year where the Democrats already have five candidates vying for their nomination and none of them seem a prohibitive favorite – has decided his candidacy would be helped with the (R) next to his name. The Cuomo appointee (Joe Lhota), meanwhile, has said nothing about his plans, but it should be noted that the idea of him running as a Democrat is not even considered. This begs the question: why is the Republican nomination considered so important in New York City? The answers pose some hope for the national party going forward.

First off, Democrats in New York have for years been firmly placed on the left, where the president only recently placed the party nationally. If New Yorkers are any indication, hard-left Democrats are going to put themselves in trouble faster than they realize.

Secondly, while “Hispanics” (I used the quotes because I consider the moniker far, far too broad) have only recently been a major force in national elections, they’ve been a critical part of the New York political scene since the 1960s, if not earlier. They are by and large more prosperous than their national counterparts…and as such more likely to vote Republican for Mayor (Bloomberg carried Hispanics narrowly in 2001, and won 43% in 2009). This comes with a caveat – their is a much heavier Puerto Rican presence in NYC than in just about any part of the country outside Florida – but it does reveal that voters with Latin American ancestry are not necessarily immune to Republican messages or candidates.

Finally, there is the matter of how the Republicans (weak as they are in the city) appeal to the electorate in front of them. To the extent that consistency can be found between the two GOP-backed mayors (Giuliani and Bloomberg), it’s been on how they presented their case to the voters: safer streets, more economic growth, and reforms of government services to make them more efficient and less costly (Bloomberg focused particularly on education). On social issues, both men reflected the electorate (to the point where gays and lesbian narrowly voted for Bloomberg in 2009). I say that not to slam social conservatives. Not every electorate is New York City, and thousands of socially conservative Republican officials reflect their constituents quite well. I am saying that political success on these matters is largely determined by the culture of the electorate well before Election Day.

As it is, New York City is hardly recognizable from what it was in 1993 (when Giuliani first won). It is considered to be cleaner, safer, and largely better-run. As such, despite an allergic reaction to Republican nominees at the federal or state level, New Yorkers have been quite comfortable hearing – and taking – the GOP’s advice on who should run the city, and they may very well take the party’s advice again next November…

…and like Frank’s song says, if the Republican Party can make it there, they’ll make it anywhere.

Cross-posted to Bearing Drift

The reason Romney lost (odds are, you haven’t heard it yet)

The three most prevalent answers for what happened last night are, in order: Romney’s flaws, demographics, and the Democrats’ ground game. All of them certainly had a role (the second of them still fuels my flirtation with rebooting the right with a different party), I think there is one “fundamental” that was more important at the end of the day.

Usually, an incumbent presiding over an economy as bad as what we’ve seen since January of 2009 is sent packing – emphatically. The president’s argument was, essentially, that 2008 was so bad and so out of character in economic terms that the normal rules of judging his record don’t apply.

Now where could the president possibly get this idea?  Well, in 2008, a whole slew of Republicans insisted…things were so out of character in economic terms that they needed send $700 billion to major Wall Street banks. Among the GOPers who violated free market principles out of “necessity” were President Bush the Younger, his cabinet, now-Speaker Boehner, most of his caucus, Senate Minority Leader McConnell, most of his caucus…and both Mitt Romney and Paul Ryan.

Now, it helps that I fervently believe the bank bailout (a.k.a. TARP) was a terrible economic mistake (and yes, I said it back in 2008, too). That said, a candidate who opposed TARP could explain why it made a touchy economy much worse, how the deepest part of the Great Recession came during the bailout’s passage and implementation, and that those who backed it (Bush and Obama) made a serious and critical mistake.

That would have separated the candidate from TARP and Bush (the latter still blamed by 53% of the voters for the current stagnation – Fox News). Instead, Obama’s argument about the dangers of 2008 were echoed – however subtlely – by Romney and Ryan themselves.

Simply put, those of us who picked Romney over Santorum or Gingrich (both of whom opposed TARP) made a mistake. Could Obama have beaten either of them? Perhaps, but he certainly wouldn’t have been able to use the “inheritance” argument, because both of them would have insisted the economy did not need the bank bailout; that the president made things worse by his support for the bailout as a 2008 candidate; and that as such, the economic hardships from 2009 on should be placed solely at his feet.

Whatever the Republican party chooses to do in 2016, if they wish to win back the White House, they must nominate an outspoken opponent of TARP – preferably a member of Congress who voted against it.Otherwise, voters will continue to hold the Democrats innocent of their economic record until the next peak in the economic cycle – which could be as late as the mid 20′s.

Cross-posted to Virginia Virtucon