Releasing the Special Interest Hounds

So the much anticipated "stimulus" package to be enacted soon after the new Congress comes into session with a price tag potentially reaching $1 Trillion, will likely become the largest pork barrel bill in history. The centerpiece of the plan is infrastructure projects. Now infrastructure can be beneficial if there is a positive return on investment. However, considering the size and the speed at which this bill is likely to be enacted, it is likely going to be dominated by special interest “bridges to nowhere” and not legitimate public investments.

Also embedded within this bill will be all the various special interests who try to direct the funding to their pockets. One of these is the steel industry, which is currently lobbying Congress to include a “made in America” clause into the bill, which would force all projects to use solely American made inputs, specifically in this case – steel. This will only benefit the steel industry at the expense of everyone else. Projects will be slowed down due to supply bottle necks if potential supply sources are limited, and the costs of the projects will be higher. This means a worse deal for the taxpayer. Possibly more importantly however, is that it will divert greater amounts of capital to these projects then would have been required, displacing it from other areas of the economy. Ultimately this will destroy more jobs in other industries that are competing in the capital markets.

The irony is that one of the first things the Bush Administration did when it entered office was place a steel tariff on imports in order to “protect” steel producers. However, many more companies use steel then make it and the net result was a loss of jobs and higher prices for consumers. The Obama Administration would be prudent to not follow in Bush’s footsteps and create his own steel industry bailout at the expense of everyone else.

-EJB

The Next Round of Bailouts: The States

So with all these bailouts, one of the effects they are having is greatly increasing the moral hazard throughout society. One of the reasons why we are in the mess we are currently in is that a huge moral hazard was created via the implicit guarantee of Fannie Mae and Freddie Mac. Investors correctly felt that the institutions would be bailed out if they got in trouble and this allowed the two firms to borrow money at a below market rate and pump an excessive amount of capital into housing. So apparently not learning from our lessen, we’re now doing exactly that again with banks, auto makers, your uncle who’s delinquent on his credit card and so on.

So the next one on the list is bailing out state governments. Senator Schumer has stated that his state of New York will likely be getting $5 billion in increased transfer payments via the Obama administration's proposed stimulus package. It has also been suggested that California is to be bailed out. One of the beauties of State governments is that unlike the Federal Government, they cannot borrow endlessly. This is mixed with the fact that if they raise taxes to too high of a level residents and businesses will move out. These two forces combined place a check on State budgets and this forces them to be fiscally responsible and relatively efficient. These two mentioned states, along with many others went on spending sprees in the most recent good years without regard for long-term planning. California’s budget grew almost 30 percent in the past 3 years. But now that the Federal government will step in and bail them out, the moral hazard of over spending has increased greatly for years to come. The California legislature is being resistant to spending cuts currently. Perhaps it’s because they know if they wait long enough, they will be bailed out? Now every state legislature knows it does not need to keep spending in line or create rainy day funds for use in recessions, because every time we get into one, they are going to be bailed out.

This creates the obvious problem of promoting irresponsible behavior on the part of the States, which ends up being paid for by the Federal taxpayer. Beyond that however, is the continued erosion of the notion of the States being sovereign bodies. Rather than being independent levels of government, if the budget processes are now created with the assumption of Federal help, the States become more similar to the French Departments, merely administrative districts rather than separate governments. Power therefore only becomes more centralized and less in touch with constituents. Furthermore, how come New York and California are the ones in which the bailouts are being designed? Why not Rhode Island, Virginia or Arizona, which have huge budget problems themselves? Could it possibly be that both these states are heavily Democrat (and therefore the same party as the current controlling government) with influential Congressmen representing both of them, including the Speaker of the House, the Chairman of the Ways and Means Committee, and a woman soon to be Secretary of State? Bailouts just become another mechanism of corruption and party hackery. Just as soon to be former Senator Stevens was allowed to get away with his abhorrent pork projects because his party controlled Congress, so will those who now have favor with the current government.

-EJB


_________________________________________________________________


It certainly seems like, in this new culture of bailouts, there ought to be an increased risk of the moral hazard that EJB mentions. After all, it stands to reason that if the Federal Government is willing to bailout banks for bad business practices - and now, apparently, some States for their failure to adequately plan for their future - other sectors of business (and indeed, other States) would feel comfortable knowing that their fiscal shortcomings will be federally insured. I'm not sure it's just that simple though. Look especially at the recent automobile bailout. Officially, I guess it is a bailout but the bill never got through Congress; Bush had to semi-legally divert funds to GM from the original "stimulus package." I think it's safe to say that a large contingent of the population (and of Congress) is tired of taxpayer bailouts. This shifting of public will may not allow for further bailouts. Furthermore, all it takes to soften the blow of the moral hazard is one major bailout proposal rejection. We may have seen that with the auto bailout. If the Federal Government refuses to bailout a company or State that is asking for money, other entities won't be so quick to assume that they'll be guaranteed any sort of insurance.

Now to the California and New York stuff. Again, I think it's sort of facile to point out that NY and CA are liberal states and thus, wink wink nudge nudge, they're getting bailed out. I'm not saying there isn't some truth to that, but EJB points out later in the post that Rhode Island isn't being bailed out. Is there a more liberal State than Rhode Island? I've lived there. There is not.

Also, I bet we could discover all sorts of plausible rationales for the bailing out of New York and California. My first thought was to note that these are two of the largest States, by population, in the country. In fact, they are first and third in that category. Thus a State business bailout or a capital injection that props up Medicaid in New York helps more people than a similar plan in Arizona. Perhaps Obama, curtailed by a sinking economy, is implementing a fiscal triage.

But maybe you don't buy this strict utilitarian explanation. Fine. I think another relevant factor in the bailing out of California is the fact that the State is literally out of money. As much as I'd like to back EJB's moral/philosophical argument about moral hazards and learning important lessons, it's probably vitally important to first make sure that each State has enough capital to continue its operations. Otherwise we're simply winning the battle to lose the war. Or perhaps we'd be throwing the baby out with the bathwater. All I know is, there must be some folksy idiom that applies here.

As for NY, another possible explanation for bailing it out is that this could be a very good move for the national economy. NY ranks fifth amongst the States in GDP per capita. Thus it seems logical to conclude that more business is done in NY. Complete the syllogism and it points to the fact that bailing out NY is more economically beneficial for the Federal Government than bailing out Alabama.

So anyway, I'm not sure why they're doing this. Perhaps EJB is correct and this is merely a political pork move. I think there's probably some truth to that. But I propose that there are other, more legitimate, reasons for the NY and CA bailouts.

~JSK

Goodbye Gitmo?

In an interview with CBS on 11/16, President-elect Obama maintained his position that he would close the detainee camp at Guantanamo Bay soon after taking office. He reiterated that the move would work to "regain America's moral stature in the world." Perhaps. I think it's clear, though, that there are other reasons for closing Gitmo that strike most people as rather self-evident: a symbolic departure with the Bush Administration's handling of the "war on terror," an attempt to end foreign pressure regarding torture and illegal detention, a need for increased transparency into the actions of the Executive branch. These are all well and good - but I just have to ask...maybe this is coming a bit too soon? I thought I was crazy when, a few weeks ago, I suggested to EJB that we develop a debate case centered on the theory "Obama should not close Gitmo within his first 100 days." The move just seems so morally justified. Thankfully, I've confirmed that I am not crazy - others are just as concerned as I am.

Here.

There are a few concerns I'd like to just mention, but, considering length constraints, I'd rather not fully develop arguments for any of them.

First, where will you put the detainees? Domestic prisons will absolutely refuse to accept terrorists amongst their ranks. NIMBY is one reason. Concern over increased prison violence is another.

Second, what of the 100 or more detainees who are still proclaiming to be hostile to the United States? We can't simply deport them - they'll immediately rejoin the ranks of al Qaeda and take up arms against us.

Third, what of the 150 or more detainees who are NOT hostile to the United States, but cannot be deported to their home States? This is a weird concern because the options are 1)continue to illegally detain a non-hostile innocent; or 2) ship the non-hostile innocent back to a country like Syria or Iran where he is wanted and will likely be tortured or executed. Which option is best for the individual's well-being? Do we have the right to act so paternally? What of those detainees whose home country no longer exists and whom no other country is willing to accept?

Fourth, under what system are we to try those who are triable? If we try them under a civilian system, many will be acquitted for lack of evidence. If we try them under a military system (which might not even be allowed under Geneva), we'd still have to find a place to incarcerate them.

Needless to say, this is a difficult situation. I am not sure how to answer any of these questions and thus I cannot profess to side with those who would close Gitmo or those who seek to keep it operational. The only thing this does prove, I believe, is that, considering the delicacy and difficulty of the situation, it would be unwise to move quickly towards any decision. There is absolutely no rush to close Gitmo - it has survived international scrutiny since 9/11. I would be wary of huge political moves made in haste.

~JSK

History Repeats Itself: A Look at This Election in a Certain Cyclical Perspective

I hope you are willing to bear with me on this long post.

So with last night’s election results, the nation moves forward with a new President and Congress. Part of me is overjoyed that this long process is finally over and part of me is intellectually curious to see how a Democrat controlled government will rule after years of Republican dominance. I see certain benefits to this change in the hopeful end of our cowboy diplomacy of late (though I’m no fan of the Democrat’s propensity to surrender national sovereignty to international organization either) and hopefully the end of a Republican party clinging to power via cultural battles. They have to begin some soul searching again and develop new ideas to actually govern, while at the same time I am willing to bet that for political reasons, the Democrats will largely avoid their own social issues agenda in the near future.

But the overarching shift that I see occurring right now in our balance of political coalitions is disturbing. JSK and many others continue to dismiss the notion of this as being a great leap in favor of government power and the social state, chalking this up to me worrying and over reacting. It is true, that we are not going to suddenly see a socialist workers paradise, or a sudden rise of the next Soviet Union, but I have never been saying that. The Republicans, if they survive recounts seem to have held 43 to 44 Senate seats, maintaining their power to filibuster, but even if they hadn’t we still wouldn’t have seen these extreme developments. What I do believe, however, is that we are about to likely take the next large step in the direction of a socialist democracy, and all the pains that accompany it. Six time early 20th century American Socialist Party Presidential candidate Noram Thomas said:

The American people will never knowingly adopt socialism, but under the name of
liberalism, they will adopt every fragment of the socialist program until one
day America will be a socialist nation without ever knowing how it happened.

If one looks back now at that party’s platform in the early 1900’s virtually all of its policies are now in place and his words have a prophetic feel to them. Take a look at Marx’s ten planks of how to transition a nation into Socialism. We have most of them at least partially implemented currently.

Along this theoretical framework, American history of the past century has been marked by a period of movement towards social democracy, followed by a period of backlash after years of poor economic conditions created or at least exacerbated by those very policies. In this latter period, most of the programs earlier created are not removed, but the growth of new ones is hampered. Then when the cycle repeats itself, it picks up from where it left off.

The first period was the Progressive era, and more in particular the Wilson years, where the Federal Reserve and income tax came into full fruition. In addition, America’s isolationist tradition came to an end with an expansion of government power abroad via the involvement of the country in WWI. Partially due to the war, partially due to high income tax rates to finance the war, and partially due to a Federal Reserve that had no idea what it was doing, the latter half of the period was marked by heavy levels of inflation and general economic pain in addition to the struggles of war. Between the burdens of the war itself, and the inflationary period, this episode came to an end with the overwhelming election victory of Harding with his pledge to “return to normalcy.” He and his congressional allies cut taxes, reduced the size of the military and largely governed in a hands-off approach, in direct contrast to their Progressive predecessors. He and Coolidge thereafter presided over a period of general peace and prosperity.

This changed however, when Hoover, a big government president, who redirected his previously laissez-faire party into one of trade protectionism, much higher tax rates, wage controls in industry, centralized industrial and agriculture planning, government regulation and so on. Scrambling to react to the Stock Market crash, these large government responses only exacerbated the situation, turning a recession into the beginnings of the Great Depression. Despite Hoover being the most interventionist President to that date, this didn’t stop FDR from blaming the current situation on the free market and Hoover not doing enough. FDR rose to power as a savior figure, promising to do so by greatly increasing the power of the government. His policies elongated the Depression by taxing investment heavily, creating uncertainty in markets, and driving up unemployment particularly in the 1937 “Depression within the Depression.” This latter phase was partially driven by the implementation of the Wagner Act, which had the effect of forcing increased union wages without any increase in productivity while labor demand was already weak and by raising taxes for Social Security. They combined to drastically raise unemployment. These policies were the same things Hoover did in 1930 just rehashed and taken further. Rexford Tuggwell, one of FDR's advisers later commented that although no one would admit it at the time,

...practically the whole New Deal was extrapolated from programs that
Hoover started.

The backlash occurred starting in 1938 and 1940. Despite FRD winning a third term on the grounds of the developing WWII, his liberal congressional allies were defeated in these two elections. The Republicans gained many seats in the Congress and allied with the Southern conservative Democrats, this “conservative coalition” was formed. First led by Senator Taft and later Senator Goldwater, this coalition marginally controlled Congress from 1938 until 1964 with the exception of two of Truman’s years. Though not powerful enough to repeal most of the New Deal programs (as many members now wished to preserve those programs already created), it largely prevented the creation and expansion of new ones. Government policy in this era focused around infrastructure development and scientific research, and not increasing wealth redistribution and social engineering as it had in the New Deal. Further aided by Kennedy’s large tax cut, this period was one of general prosperity.

The cycle reset itself beginning in 1964 with LBJ’s crushing victory over Goldwater, where he gained a large number of Congressional seats. Government went back to the business of increasing wealth redistribution and social engineering. Furthermore, the Federal Reserve started expanding its role again, trying to not only provide price stability but by actively trying to increase employment operating under the notion of the Phillips Curve. This Congressional coalition ruled until 1980, and its Presidents following LBJ were all big government proponents (accept maybe Ford, but he had little policy influence in his two years). As Nixon famously exclaimed, “We’re all Keynesians now.” He continued LBJ’s intervention with price controls, more market intervention, high taxes and via getting off the gold standard completely, now gave even more control to the Federal Reserve. These years from LBJ through Carter saw ever increasing inflation and rising unemployment, a deteriorating fiscal situation and under performing financial markets.

After years of pain, the message that Goldwater failed to win by, Reagan used to sweep to victory in 1980 and with him a new Congressional coalition. The Republicans took the Senate, and gained enough seats in the House that along with the Southern “boll weevil” Democrats, gained an effective majority. In a period of reducing social programs, deregulation, lower taxes, and tighter monetary policy, prosperity began to reemerge. With the exception of the first two years of the Clinton administration, this new Congressional coalition held control from 1980 until 2006 (though they stopped governing this way in the 2000s). Unemployment rates steadily decreased, inflation lessened and the stock market saw its greatest 20 year period in history. This too changed however. Much like Hoover, our outgoing president has been a big government ruler. He took a previously small government party and turned his years of governance into the largest spending increase over a 6 year period (2000 to 2006) since LBJ. The government increased regulations heavily in the wake of September 11th and via Sarbanes Oxley, diminishing the US competitive position, energy markets were manipulated through ethanol and trade protectionism, the fiscal condition worsened, and government continued to gets its hands more involved in housing markets via Fannie and Freddie and the FHA. Foreign intervention became the dominating political issue via Iraq and Afghanistan. And just as FDR blamed a big government Republican for being laissez-faire, so has our next President blamed Bush and the free market, when in reality as I have talked about before, our real mess was largely due to poor government involvement (here and here).

So now there returns a liberal pro-government majority in the Congress, with a President promising larger government yet again. The question now is that is this simply a two year period, as with Truman and Clinton where it is only a pause in the smaller government portion of the cycle, or is this the beginning of the next phase? I hope it is the prior. It may be so, considering this election was more about the electorate being against Republicans then for Democrats. However, I feel it is likely the later. The Republican Party is a damaged brand and is blamed for the mess that we are currently in. The Party furthermore was no longer governing on the small government principals that got them elected in the first place. Also and very importantly, the narrative that was supported by both presidential candidates this year, that “greed” and the lack of government regulation is the root of our mess, is commonly held amongst the electorate. The message of small government is therefore greatly harmed at present. McCain’s concession on this argument has probably done more for the cause of large government than anything else, because it now admits politically and solidifies that the popularly held lessen from our recent problems is not the overreach of government trying to manipulate housing markets but that it was a failure of the free market. That is now mainstream, accepted by both parties with only fringe political forces arguing otherwise. Unless the Democrats now overeach and attach to themselves a lable of being too extreme, then it will be quite some time before the electorate is both in favor of small government again and at the same time trusting in the Republican party to deliver that.


So we are now going to likely have to feel a period of pain again, just as was required in past cycles, before the electorate is once again willing to accept the notion that as Reagan said, “Government isn’t the solution to the problem. Government is the problem.” It took about 7 or 8 years in the Wilson era to come to this conclusion, 10 to 12 years in FDR’s, and about 16 in LBJ’s. It may then be another decade before we wake up in this phase. Enlightening in Obama’s victory speech last night was the following disclaimer about his Presidency that was very slyly snuck into his speech when referring to our problems, economic and other:

The road ahead will be long. Our climb will be steep. We may not get there in
one year or even one term...

He is setting the narrative already for his 2012 reelection. If he gets many of his advocated polices through, raised taxes on capital, greater union power, protectionism through double taxation of foreign profits, and market intervention, which are all strikingly similar to the policies implemented during the past rises of government power that exacerbated our situation, he too will only postpone our recovery now. He is showing us already that his message in the face of a still troubled economy will be the same as FDR’s; that being blame your predecessor for the problems to deflect critisism away from your own failures. FDR and his coalition were able to successfully do that for eight to ten years. I hope this President will not have as much success at that. So maybe Obama will rule in a manner different then what he has said on the campaign trail, and maybe I will be very wrong in my predictions, but if history is a guide, I think we are in for a period of malaise and rough times.

-EJB


________________________________________________________________


I'm not sure why I'd even attempt to temper EJB's concerns. Frankly, I'd be happy to accept them as perfectly valid and believe that the GOP is in the midst of being relegated to a prolonged minority status. I say this for two reasons: first, much like the penitent man must suffer to attain atonement, the GOP should be punished for the last eight years of incompetent leadership; and second, because I hope that such punishment will help purify the party - and by this I mean, return it to the party of small-government proponents.

I agree with EJB when he posits that much of what we witnessed on Election Night was a public backlash against the GOP for President Bush. The message was loud and clear. Similarly, I also agree with EJB in that I believe the Dems will not push their social agenda anytime soon - Democratic strategists should recognize that the election was not a liberal mandate, but instead an "anyone but them" decree.

EJB lays out the Arthur Schlesinger model of the cyclical nature of American politics quite nicely. Although I have some minor quibbles with his assertions (Wilson as the catalyst of the Progressive Era? TR might have something to say about that), we're not here to debate about the historical accuracy of the Schlesinger model. I would argue, though (as commenter Kim points out (Hi Kim!)) that there is reason to believe that there is a strong undercurrent of fiscally-conservative thought amongst the younger generation. The unprecedented internet popularity of Ron Paul and burgeoning young conservatives like Bobby Jindal testify to this latent potential. If conservatives of that mold step up within the next four years, the 2012 election will be quite interesting - and dare I say it, EJB's concerns might be overstated. So buck up, young Reaganite, your future is not so bleak.

One other reason to question the legitimacy of the fear of Obama ushering in a socialist paradise is the Bill Clinton/George Bush example of unfulfilled expectations. What I mean is that, prior to Clinton taking office, the country expected him to implement all sorts of liberal policies - like universal health care, increased social welfare spending, etc. Instead, because of the deficit left to him by the previous administration, Clinton went small-government and drastically slashed the budget. He famously declared that the era of big government was over. Enter George W. Bush, who, so the country thought, would stick to his campaign promises of cutting taxes and spending. Nobody could have guessed that a conservative - a mere 15 years after Reagan - would increase the strength of the federal government in such ways as we have seen. And as I pointed out in my previous post, Obama has surrounded himself with Clinton aides (Rahm Emmanuel and Robert Rubin, to start). So perhaps we should expect the unexpected from Mr. Obama.

Finally, before I get into my major point (which, as you should all expect of me by now, involves the judicial system), I'd like to respond to the idea that our society has "partially implemented" Marx's ten planks of transitional socialism - because, honestly, I just don't see it.

1)Abolition of all property in land and application of all rents of land to public purposes.
Well...we still have privately owned property and land is not rented for solely public purposes. In fact, we have a pretty strongly supported system of private property in this country. True this Lockean system was undermined by Kelo...but let's be serious, Kelo has not been extended by any District Court. Nobody likes that decision and in fact, many States have enacted legislation directly contrary to its holding. So we're 0 for 1, thus far.

2)A heavy progressive or graduated income tax.
We could have a year-long debate about the definition of "heavy" but I'll be nice and concede this one. You got us there - Sixteenth Amendment? Totally socialist. Next.

3)Abolition of all right of inheritance.
I can tell you, after suffering through four agonizingly painful months of studying property law, that we are nowhere near the implementation of this one. Inheritance of land and chattels is still the default rule in every single State. In fact, the State can only inherit property if the decedent has absolutely no living kin survive him. And, even more interestingly, Article III, Section 3 of the Constitution expressly forbids "Corruption of Blood" and "Forfeiture" as a punishment for Treason. Looks like we're 1 for 3.

4)Confiscation of the property of all emigrants and rebels.
While it is true that there are many in Texas who would whole-heartedly support a law like this, we've yet to see one in any State (thankfully). 1 for 4.

5)Centralization of credit in the hands of the State, by means of a national bank with State capital and exclusive monopoly.
Here we do see some similarities. We have a Federal Reserve which does act as a national bank. The State does have an exclusive monopoly on the type of currency we can use, as well. But credit is not wholly centralized in the State and there is no such monopoly there. Perhaps Obama will act to fully nationalize the credit system due to the crash, but isn't that the crux of our disagreement (whether that will actually happen or not)? This one gets half a point: 1.5 out of 5 now.

6)Centralization of the means of communication and transport in the hands of the State.
Amtrak! I knew it! Socialist bastards. Private communication companies are prevalent. Private transportation companies are prevalent. We do have the DOT, but they're regulatory...they don't own the means of transport. This one fails. 1.5 for 6.

7)Extension of factories and instruments of production owned by the State...the improvement of soil in accordance with a common plan.
Again, I suppose we could argue that the Department of Agriculture does fulfill this tenet, somewhat. But there's a huge difference between regulating agriculture and "improving soil according to a common plan." Farm subsidies abide, but there are still privately owned farms and factories. In fact, it is the norm. I'll be generous and give this one a half point. 2 for 7.

8)Equal liability of all to labor. Establishment of industrial armies, especially for agriculture.
Industrial agricultural armies...now that would be a sight. And to dispel the notion that we're all equally liable for labor, I point to myself as evidence. I don't do anything. 2 for 8.

9)Combination of agriculture with manufacturing industries; gradual abolition of distinction between town and country, by a more equitable distribution of the population over the country.
Zuh? I mean...I guess we could argue that the rise of federal supremacy has acted to "gradually abolish the distinction between town and country," but that's a stretch. Our federalist system, especially since the Rehnquist Court, has never been stronger. And what's all this jazz about redistributing the population equally over the country? Evidence that this has not happened: electoral college. 2 for 9.

10)Free education for all children in public schools. Abolition of children's factory labor.
Socialist scum! How dare they want to educate all children free of expense and liberate them from factory work! Seriously, public schools aren't free in the sense that we pay for them through taxes. Plus "all children?" Not even close, sadly. Though we have abolished child labor. So this is a half a point that I think we should be proud of.

The final tally, then is 2.5 out of 10. We're 25% socialist; mainly because we ended child labor, set up the DOT and Dept of Ag and we have the Federal Reserve. I think I'm OK with this.

***

But here's the real meat of my response to EJB's post. I am most interested not with what EJB has included in his post, but what he has chosen to leave out of the discussion. He mentions the Executive and the Legislative branches and details their progressions, but nowhere is the Judiciary mentioned. This is a key issue when pondering the question of whether Obama's policies will move us even further to the left than FDR and LBJ because it will be the Supreme Court which will ultimately sign off on any Obama-created socialist policy - and it's where we can definitively distinguish Obama's future term(s) from FDR's or LBJ's.

Now, any socialist policy that would continue the work of the New Deal or Great Society would need to be passed pursuant to the Commerce Clause. Everyone pause to shudder while we think of what has become of the Commerce Clause. FDR's Supreme Courts (the Hughes Court and the Stone Court) essentially aided FDR's New Deal by drastically expanding the definition of "commerce" and altering the previously entrenched constitutional interpretation of the Clause. The Court packing scheme that FDR tried to use was not a result of the Court stonewalling him - but actually an attempt to get the Court to approve of every single proposed measure, rather than a mere majority of those measures.

The Hughes Court (1930-1941) included such "judicial activists" as Louis Brandeis, Oliver Wendel Holmes, Harlan Stone and even Hughes himself. These Justices sided with FDR's "commerce" interpretations and helped usher in the New Deal. In fact, only four Justices (McReynolds, Butler, Van Devanter and Sutherland -known collectively as the "Four Horsemen") stood up to FDR during the 1930's. The addition of Benjamin Cardozo gave FDR the edge he needed. Also important to note, FDR had nine Supreme Court appointments starting with Hugo Black in 1937 and lasting through Rutledge in 1943. The other seven were Reed, Frankfurter, Douglas, Stone (to Chief Justice), Byrnes and Jackson. By the time the Stone Court (1941-1946) rolled around, it was filled to the brim with FDR supporters. Thus, the New Deal was approved and facilitated by a very progressive, very executive-deferential, Supreme Court. (Though, if any of you Supreme Court history buffs out there want to yell at me about calling Frankfurter an FDR supporter, I'll accept your criticism...he was the only one, though, who really went conservative after appointment.)

As for LBJ, EJB himself admitted in a previous post that the mid-60's was the height of the Progressive Court. LBJ presided under the Warren Court (1953-1969), which included the most liberal/progressive Justices ever amassed on a single bench. William Brennan (my favorite Justice of all time), Thurgood Marshall, Hugo Black (the very same FDR appointment), Harry Blackmun (who authored the Roe decision), Byron White (who, despite the name, sided with Justice Black quite often), Potter Stewart (a centrist who leaned left) and Tom Clark. The Great Society stood absolutely no chance of being ruled unconstitutional by these guys. None.

Now we have Obama, who comes to the Oval Office in the midst of the Rehnquist "Federalist Revolution." The leading case is US v. Lopez, it was the first time in over seven decades that the Supreme Court limited the government's interpretation of the Commerce Clause. Lopez and its progeny (most importantly Morrison) signaled the end of the Progressive judicial movement. It also sent a message to the country that the Court would no longer defer to the President or to Congress; they would be entirely willing to strike down a democratically passed law if they felt it stretched the Constitution too far. This was a monumental swing. Here's the majority in Lopez: Rehnquist, O'Connor, Scalia, Kennedy, Thomas. Now here's the important part - George W. Bush sealed Obama's fate with unbelievably excellent (in conservatives eyes) Supreme Court appointments. Chief Justice Roberts, who clerked for Rehnquist, is his predecessors student - and an apt one at that. Justice Alito will easily fill in the void that O'Connor left. Thus a strong majority still exists (Roberts, Alito, Scalia, Thomas, Kennedy). Even more encouraging for those worried about a socialist rebirth, none of those five are going anywhere for the next eight years. Scalia is 72 but shows no signs of slowing. Kennedy is 72 as well, but has expressed no hint of retirement plans. Thomas is 60. Alito is 58. Roberts is 53 (53! A thirty-year Roberts Court is entirely possible! Blech...). Thus, any Supreme Court vacancies that Obama would get to fill would likely be liberal Justices (I'm looking at you Stevens, Ginsburg and Souter - all of whom have expressed their desire to retire if Obama is elected).

So, I too apologize for the length of this post, but I feel that it was important to note. I think it is the most important issue regarding this debate, because, again, it is the Supreme Court that must ultimately decide the fate of any proposed legislation. Fiscally-conservative conservatives (or Goldwater republicans or classically liberal republicans or small-government conservatives or whatever you guys choose to call yourselves these days) can rest easy in the knowledge that their hold on the judiciary (in the Supreme Court at least) is pretty strong. That's one thing Bush did well for his party.


~JSK

A Rose By Any Other Name

Congratulations to President-elect Obama and the Democrat party in general for their victories last night. Obama's quasi-landslide, facilitated by the fact that he pretty much swept every key swing State, surprised me slightly. And the Dem's picked up some key Senate seats (take that, Elizabeth Dole), but will not reach 60 for a super-majority...I guess we'll have to wait a little while longer for the complete nationalization of private industry, the elevation of unions to Big Brother-esque power, free unlimited abortions for every woman and the changing of our national symbol from the bald eagle to the hammer and sickle. Here's hoping for 2010, though.

Obama must obviously be excited - in the same way that any comic who is informed that he'll be performing after Carlos Mencia is excited; safe in the knowledge that he can't possibly do any worse than the last guy. Seriously, if Obama sat in the Oval Office and played Sudoku for 4 years, he'd go down in history as a better President than GWB. Not content to sit around and do nothing, however, Obama apparently has plans and goals.

So it's been less than 12 hours since the Obama victory was announced and, much to my surprise, there has been no noticeable change in life (for better or for worse). The sky did not open up, fire did not rain down upon us and I did not even hear a single trumpet (if you got that last one, I'm impressed. If not, here.) On the flip side, the blind still cannot see, the water in my sink is not wine, wars and genocides continue globally, and it is still true that white colonists enslaved Africans 300 years ago. But like I said above, Obama has plans.

I'd just like to forewarn Obama backers that they should temper their excitement a little. This article, though a few months old, gives good reasons why: he can't possibly find the money for all his change. $6billion for rebuilding bridges and dams? $15 billion for developing clean energy? $10 billion to bail out foreclosures? $18 billion for education? I guess my favorite is $50 million a year to "help make men better fathers" - I assume that means giving that money directly to the dad's so they can buy their kids an IPod...that automatically makes you a better father.

The article notes that Leon Panetta, Bill Clinton's former chief of staff, suggests that Obama is going to have to cut back his plans a bit. Fortunately, Robert Rubin, a former Clinton adviser has been working closely with the Obama campaign. This is a good sign. It may just be that Obama realizes, much like Clinton in the 90's, that he will have to forgo many of his campaign promises in order to focus on deficit-cutting. It will be difficult because Obama promised so much to so many people...but if he takes even a modest step towards balancing the budget and reducing our national deficit, he will be serving the people in a manner more praiseworthy than any government program he had planned on creating.

~JSK

Well, Iran Seems Reasonable

Much has been made of the presidential candidates' differing stances on initiating diplomatic talks with Iran. Obama has held that he would be willing to open discussion - below the presidential level - with Iran without any preconditions. McCain has argued that such a stance is dangerous and would not engage Iran diplomatically without their having met certain conditions precedent.

The WSJ today posted this interesting article about what the Iranian government thought about all this diplomatic talk. They admitted to having two preconditions of their own before they'd consider diplomatic discussions with us. As we might have expected from Iran, those conditions are entirely fair and reasonable:

"Mehdi Kalhor, Vice President for Media Affairs, said the U.S. must do two things before summit talks can take place. First, American military forces must leave the Middle East -- presumably including such countries as Iraq, Qatar, Turkey and anywhere else American soldiers are deployed in the region. Second, the U.S. must cease its support of Israel. Until Washington does both, talks are "off the agenda," the Islamic Republic News Agency reports. It quotes Mr. Kalhor as saying, "If they [the U.S.] take our advice, grounds for such talks would be well prepared."

Yes, well...I think it's safe to say that neither of those two conditions will be met in the foreseeable future (though I am with them on that first one). What's interesting about the article, though, is that it's titled "So Much for Obama's Diplomacy." Apparently, the author of this article thinks he is devastating Obama's stance and winning the debate for McCain. But is that what's happening here? I think not.

Three years ago, my friend Rob and I entered into a debate round against a formidable Harvard team. They proposed that the United States should reauthorize political assassinations of foreign leaders and diplomats. Wow, I thought, this will be easy to defeat - killing is bad! So Rob and I spent a good 25 minutes listing and analyzing the myriad negative consequences of reinstating political assassinations. In their final speech of the round, Harvard dropped a bomb on us. Their argument went like this: "Well...we never said we'd actually USE the assassinations...we just see no reason to indiscriminately take it off the table. We, Mr. Speaker, give you more options than those jackasses!" They blindsided us by shifting the debate. Needless to say, we lost.

Mr. Obama, I will speak to you now. You went to Harvard (law), use their tactic - it's a debate winner! Remember that, because Iran is insisting on these ridiculous preconditions that will never be met, it's likely that this entire policy debate is a wash, because we will NEVER engage in summit discussions with the Iranians! Contrary to the belief of the author of that WSJ article, this fact cuts in your favor because, if the Iranians ever were to reconsider their position, you would give the United States more options than your opponent! You would not categorically reject unconditioned talks. And like I said, it's entirely likely that Iran will never agree to any talks anyway.

Seriously, though...McCain's stuck in the position poor Rob and I were. His only real argument against Obama's viewpoint has been that unconditioned talks would "legitimize" Iran's government. Odd...do we not recognize the legitimacy of Iran's government? Oh we do, right. Are we really a culture who would believe that we endorse the views of any government we engage in diplomatic discussions with? I can't believe that. Thus, Mr. McCain...you might as well just move on from this line of argument. Obama has successfully blindsided you with an "options" move. I know, I know...what a Harvard thing to do. Bastard.

~JSK

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Though I partially concur with the point being made about Iran, I disagree with your analysis of this being the infamous "options" scenario. Being an option would be keeping this idea on the table, which is quite different then what Obama has been saying for the last two years, which is essentially that he is attacking Bush for not talking with Iran. This says he just doesn't want this as an option, but rather that we should do it. That distinction is quite important.

However, both Obama and McCain have shifted their positions in Iran quite a bit, at least in rhetoric over this election cycle. In the primary, Obama suggested that unlike Bush, he would make it a priority to have high level or even presidential level talks with Iran as soon as he was in office. This then shifted eventually to leaving it open as an option and then only an option at lower diplomatic levels. McCain in turn, adamantly argued against any level talks without preconditions, which then transformed into simply no high level or presidential talks and now seems to be hinting to be open to lower level talks. The fact is that what both of these men are now suggesting we do actually comes pretty close to the current policy, as Bush has eased his position himself quite a lot and we already have had numerous talks with Iran at 3rd party locations such as the Middle East summit in Baghdad this past year. This seems to not be picked up by anyone. It would appear the media is enjoying letting the campaigns try to paint each other as being extreme.

But with that said, my thoughts. The entire main focus over Iran is obviously their nuclear program. Either way, I think we're in trouble if our goal is to stop them from achieving this. Despite the official Iranian line about creating reactors for electricity, its pretty obvious that no country is willing to absorb major sanctions and diplomatic conflict just for electricity, especially when the country is sitting on a huge oil reserve and the country lacks a tremendous amount of more basic infrastructure. They have their heart set on achieving this, and there is nothing we can really do about this. So a few points:

How we got here: We basically screwed up with this in two areas. First, through our actions with North Korea in the 90's as well as more recently, when they achieved a weapon, we showed the world that a country working towards weapons could use that as leverage to extort aide packages and other giveaways. Dealing with the problem that North Korea was trying to developed a nuclear program, the Clinton administration, via Secretary Albright gave a whole host of aide packages to North Korea as well as nuclear materials if in return they gave up pursuing nuclear weapons. They took our aide and then developed a weapon anyway. The Bush administration in turn, has offered even more aide packages to give up these weapons programs. The result is that the world has seen that nuclear programs are great leverage in getting what you want.

Mix this with the fact that the US is considered by many, particularly in the Middle East, to be very weak and without a stomach. A few examples: a letter between militia groups in the 1983 Lebanon bombings stated, "If we kill 15 Marines, the rest will leave." We did nothing when Saddam kicked the weapons inspectors out in the 1990s. Bin Laden referred to the US military as a "paper tiger." Essentially there is precedent that the US will do little even if it sees a nation as being belligerent.

Second, is where I agree with with both Obama, and presumable JSK, is that yes, the invasion and following [mis]management of Iraq has only intensified Iran's abilities because of fueling a very strong anti-Americanism in the region, while at the same time, we removed Iran's biggest regional rival that kept it in check.

So Now What? So this leaves us in a big jam. I'm not sure what talks are supposed to achieve. I don't buy into the argument that our problems with Iran are simply a "lack of understanding". They want a nuke for the reason already mentioned, but also so they can intimidate and gain power in their region against rivals such as the Saudis. Our larger problem is that we have almost no leverage with Iran. We already largely don't trade with them, so no more sanctions can be placed. The UN won't place more sanctions because Russia and China want access to their oil fields, and Europe won't push too hard because they are worried about Russia, which holds them hostage via natural gas supply. Iran knows that we can not exercise any military action, both because we are logistically bogged down in Iraq and Afghanistan, but also because of those two wars, there is absolutely no political will to take action against Iran within the US. And even if there was, what are we going to do? Take over another country, and then we have all the problems we have in Iraq?

So sticks are off the table; maybe we can offer carrots, but that is exactly what one of the goals of trying to achieve a nuclear program is. If we comply, this will further entice more nations to develop weapons, just as our North Korean example likely did. In the past with other nations, such as the Soviets, there were many bargaining chips available. But in this case having high level talks (and give Iran that propaganda tool) is one of the only, even if very limited, bargaining chips we have. Part of this is because we are tied down due to the Bush administration's past insistence on denying talks, calling Iran the "Axis of Evil" and so on. Any policy change now would seem to be a sign of weakness and defeat, which will be used politically within Iran and as propaganda with other countries to bolster anti-American sentiment, strengthen internal power and hurt the US position, and in the end they don't actually and their program. Either way we are in trouble.

The only way in my opinion that we can do anything with Iran is find some way to play the internal powers against one another. Ahmadinejad has little official power, but the theocracy has allowed him much leeway partially because he has been able to bolster the diplomatic position of the country within the Middle East and the perceived leadership role of Iran through feeding on Anti-Americanism (partially due to Iraq). Furthermore, the theocracy fears him, because unlike most past presidents who came out of the theocracy, he has his ties with the military, and if he feels that he is being pressured, as along as he stays relatively popular with the people, he could likely initiate a coup (or at least that's a possibility). The key is to weaken Ahmadinejad's internal position so that the theocracy feels comfortable reining him in. Perhaps some carrot can be offered, for instance helping to refine their very heavy crude that they can't process, so his ability to keep using anti-American sentiment is less convincing. But this leaves open the extortion problems earlier discussed. Quite honestly, the only thing I see working is oil has to come down in price and stay down for a while so that the sanctions on Iran actually become crippling as their export dollars decrease. Other then that, talks or no talks, I don't think this debate has any real positive consequences either way outside of our own election battles. We have basically messed up on this for almost 20 years and talking or not talking isn't immediately fixing it.

-EJB



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Well, the entire last three-quarters of your response is a nice detailing of the history of our relations with Iran and one possible course of action (playing the sides against one another). I'm not going to disagree with the historical part because I think we've all come to realize that once North Korea was able to weaponize their nuclear program, the US lost much credibility in the eyes of other countries looking to bolster their global position. It's interesting, though, that you went with the idea of attempting to get the theocracy to reign in Mahmoud. I would've thought - and would propose as the better or more likely option - that we'd go for the academics and youth culture, who have shown an amazing openness towards Western culture. The theocracy stays in power because they use fear to control the larger population. In reality, it is only a few, very vocal, extremists who are dictating the current anti-American policies of Iran. If we can sell ourselves to the new generation of Iranians, it is entirely possible that they could form the new ruling class and begin to tear down the cultural divide erected by a few religious extremists.

But I do disagree with your observation that this is not an options case. You only mention one real reason for not calling this an option case and that is that Obama would actually utilize the option his side is offering. But that alone cannot distinguish this Iran example from any other "options" example. Obama wouldn't necessarily engage in these discussions (plus, with the Iranian demands in mind, it's unlikely he'll have the chance). But even if he WOULD, it's still an options case - the Harvard team could very well argue that they'd use assassinations and they'd still have a valid options argument. This is because an options case is just simply defined by one side of a debate incorporating all of the other sides' options/benefits, but adding just one more of their own. So Side 1 has A amount of options. Side 2, to pull a successful options argument, would simply argue for A+1. That is what Obama is doing here.

Whether Obama's and McCain's policies are indistinguishable currently is really a mystery. I could sort of see why you'd argue that they're functionally the same, but I don't think this is simply a case of pure rhetoric. The statements of each candidate - regarding this issue - mean more than simply the words they use. The candidates' positions inform people of their general disposition or philosophy in regards to foreign policy. The fact that Obama's plan began with a more open and receptive stance than McCain's allows us to validly assume (for now) that Obama would simply be more flexible in foreign policy. Whether this is a good thing or not is a matter of debate - but their stances do reflect the very opposite world-views they hold. So before we go all consequentialist on this topic and just claim that either 1) both views collapse into one simply because they would likely lead to the same outcome; or 2) this debate is meaningless because the policies share a similar end-goal, let's also realize that the means to the end says as much or more about a candidate than simply looking to and judging their goals.

~JSK

"The Change That We Can Believe"... Is Coming

With all of the attention directed towards the Presidential race, we often miss the other story and that's the Congressional races. In what looks like will be another tidal wave year for Democrats in Congress, it is becoming increasingly likely that in addition to a President Obama, the Democrats will come very close to if not reaching the 60 seat threshold required to gain a filibuster proof majority. The last two times this occurred with a Democrat president was in 1933 in the New Deal era and in 1965 in the Great Society era.Both times saw unprecedented increases in the role and power of the welfare state. And this was when the parties were not as ideologically pure and there were still numerous Southern Conservative Democrats. I hope America realizes that out of its disgust for recent Republican governance, that it is about to hand a super majority to the left that has not been seen in a generation. This Congress will be an even greater rubber stamp for Obama then it was for Bush.

Considering that ideological shifts have not occurred nearly to the extent of party affiliation, voters might be in for a surprise in upcoming years. A recent WSJ/NBC poll showed that voters self identify themselves as:

43% Democrat
36% GOP
20% Independent/Other

While at that same time:

23% liberal
37% conservative
36% moderate

(sorry, I'm looking at the hard copy and can’t find the online page to link)

Today's Wall Street Journal has an overview of various bills that have either passed in the House recently but have been blocked in the Senate, or ideas that are being proposed by the majority that will likely get passed in a 60 Democrat majority. Though the article writes about these in a largely negative light, it still is a good summary. Some of the examples include:

Medicare For All- although Obama is not actually advocating a complete state-run medical system, his plan is a big step in that direction, "Mr. Obama wants to build a public insurance program, modeled after Medicare and open to everyone of any income. According to the Lewin Group, the gold standard of health policy analysis, the Obama plan would shift between 32 million and 52 million from private coverage to the huge new entitlement." The public program will be designed to displace privately insured individuals until the bulk of the populous is comfortable with state run health insurance. It is then only a matter of time before rationing and heavy taxation become a necessity as is the case in nations with national systems.

Union "Card Check" - In a blatant attempt to bolster a Democrat special interest, the right to a secret ballot for union organization will be removed so that union bosses can go back to the day of being able to intimidate workers into joining a union. This is such a blatant attempt to reward a special interest group that even stalwart of the left George McGovern has strongly come out against this.

Taxes Will Have to Rise Drastically - If the Democrats are going to deliver on all the new spending programs they are promising, unless they are going to greatly increase the deficit, taxes are going to have to be raised to a level much higher then what Obama is proposing.

Free Speech - The so called "fairness doctrine" could be returned, allowing the FCC to regulate political speech on television and radio.

Huge Intervention in Business - Everything from price controls on pharmaceuticals, increased government stakes in financial insitutions to arbitrary oil "windfall" profits taxes are likely. Free markets will soon take a serious blow.

Higher Energy Costs and Carbon Taxes - Whether or not carbon emissions are something we should worried about does not change the fact that by design, any cap-and-trade system or carbon tax will make energy and therefore everything else we consume more expensive. In addition there will be a huge new bureaucracy to manage this, which will be a lobbyists wet dream as every special interest will have a reason why they need "adjustment credits."

We are still paying heavily for the first two giant leaps in the welfare state, as Social Security and Medicare/Medicaid are both going insolvent. I hope we can afford the likely third wave that is about to come upon us.

-EJB


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Hmm, EJB...I don't think your post is nearly clear enough on how you feel about a possible Democrat super majority.

Anyway, let's get back to reality. I'm not going to sit here and try to argue that a liberal super majority would be an out and out good thing. No sane person would argue that ANY super majority is a good thing, because we all recognize the importance of internal checks and balances. But I do have a few things to add:

1) The WSJ argument is flawed in a few ways. First, it is a simple appeal to fear - something we see entirely too much in the news media these days. In fact the entire tone of the article is akin to "the sky is falling!" and almost seems to encourage voters to vote GOP simply to avoid a parade of horribles. This is not a good reason to cast a vote. If the Dems reach a super majority it will be because our republican system functioned properly - it will be the choice of the people, and likely, a consequence and direct reaction to the failed policy of the last regime. Second, the ONLY gauge the article uses to predict the impending future welfare state is that, when Dems had Congress and the Presidency, the power of the State increased. First, causation is NOT established by this reference to two time periods. The correlation is strong, to be sure...but many other factors played a role in the then Congress' decisions to back certain plans (the Great Depression, FDR's unique personality, WWII and Korea, for instance). Let's also not forget that both parties are very different from what they used to be, even from the 60's.

2) It isn't anywhere near clear that this liberal super majority is even feasible. Estimates from different sites and polls are all over the place in terms of just how many seats the Dems will pick up.

3) The Democratic Party is NOT monolithic. Let's give some credit to the different factions and philosophies that are amalgamated into what we call the Democrats. I fully expect the Blue Dog's to strengthen their voice in a super majority because we they would understand the downsides of absolute, unchecked power. In fact, many of the new Dem Congressmen would likely be of the same type as Heath Shuler, not Ted Kennedy. Also, "Democrats" like my own Senator Lieberman or Bernie Sanders have shown no problem with taking sides against the party line.

4) There would be some positive benefits to a Democrat super majority. The education system would be drastically improved as we could finally get rid of the failure that was "No Child Left Behind." Obama's plan to improve and repair the national infrastructure would bring a much needed technological upgrade to our nation's highways, railroads and airports (much like FDR's infrastructure plan did - sans the airports). Anyone driving up 95 from NYC to Boston could tell you that they wouldn't mind paying a little more in taxes if it meant a safer and wider highway. Bridges and overpasses are literally crumbling all across the country. I also must disagree that the implementation of a State-run Health Care system would be a negative consequence of this supposed super majority. The quality of life for many of our poorer citizens would improve with Democratic policies. I'm not going to go into a full list of every possible beneficial policy that could get enacted.

Nobody should be arguing that a Dem super majority (or any super majority) is the best possible scenario for our country. But come on, EJB (and NTC), have some faith in our electorate. You guys are libertarians, you're supposed to believe in the power of people to choose the path that is most right for them. Thus a super majority would be right simply because it was so elected. And if they really do screw things up like you say they will, it'll only last two years because the people will shuffle them right out. The sky is not falling...we are not heading for a totalitarian welfare-state...let's get real.

~JSK


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Few things. First, I definitely acknowledge the tone of this article upfront saying, "Though the article writes about these in a largely negative light, it still is a good summary."

Second, you set up a straw man when you say, "Second, the ONLY gauge the article uses to predict the impending future welfare state is that, when Dems had Congress and the Presidency, the power of the State increased. First, causation is NOT established by this reference to two time periods." The major premise of this article is that the bulk of the things listed are bills that have already been passed in the Dem controlled House in the past two years, but were blocked in the Senate. Or, they are things that Obama supports and the House would likely pass. This is not mere correlation, it is based on very recent history. The correlation only compares past historical precedent.

Third, though yes the Dem party is not monolithic, it is far more uniform then it had been in the past two time periods shown. There are the Blue Dogs, but they are far from the old southern democrats which in the Senate, we probably saw the last real one retire in Zel Miller. The legacy of the Southern Democrats is largely now in the Republican Party (for instance Sen. Shelby from AL was initially elected as a Democrat). The only current Dem Senator currently which I would argue could be called a conservative democrat is Ben Nelson from Nebraska. If he wins, Musgrove from Mississippi might be considered one too, maybe. I don't see many Democrats, particularly in the Senate, blocking anything the leadership puts through with the exception of some decisive social issues. As far as spending and social programs, they will pass just as they did with all the Blue Dogs currently in the house.

Fourth, I'm not saying a super majority is definitely going to happen. But its quite feasible. I even use language as "increasingly likely that they will come close if not reach" and place a "?" on my chart. I am only discussing a possibility that is quite feasible but not guaranteed.

Neither am I arguing that a Dem majority necessarily brings all bad things, but it brings the list that I discussed (though I would argue that No Child Left Behind needs to be totally scrapped).

Fifth, you seem to not get what "libertarian" means when you say, "But come on, EJB (and NTC), have some faith in our electorate. You guys are libertarians, you're supposed to believe in the power of people to choose the path that is most right for them. Thus a super majority would be right simply because it was so elected." I do believe in the ability for the individual to chose the path for themselves. I don't believe in the ability of the individual to dictate that an authoritative power decide whats right for another individual.

Lastly, I am not making the argument that we are going to become the Soviet Union or an "authoritative welfare state." What I am arguing is that assuming that the Democrats get 60 seats, we are very likely to see the next major leap towards the expansion of the welfare state, just as the the last two occurrences did, and what has been passed in the House already is a very good indicator of what will happen if the Senate and President are on the same page. We will further move more in the direction of a European Social Democracy and away from a Liberal Republic.

-EJB

The 95% Tax Cut Myth

Sen. Obama often uses the line that if elected to be President, his plan would cut taxes for 95% of earners. First off, one has to make the assumption that this could even be feasibly done considering our fiscal situation. Estimates of his spending and tax plans state that he would increase the deficit by about $280 billion per year by the end of his first term. And this assumes Iraq spending comes to an end, and includes a very generous estimate of what his health care policies will cost; his campaign vaguely argues it can find unspecified $93 billion per year in "health care savings" within the existing budget programs. To be fair, Sen. McCain's proposals would also increase the deficit by about $230 billion per year according to the same linked study.

But if one can get beyond all this reality, there remains the myth that Obama really would cut taxes for 95 percent of people. The Wall Street Journal has a pretty good article in today's paper explaining how most of these "tax cuts" are really just welfare payments. As the article explains:

For the Obama Democrats, a tax cut is no longer letting you keep more of what you earn. In their lexicon, a tax cut includes tens of billions of dollars in government handouts that are disguised by the phrase "tax credit."

The truth is that most of these "tax cuts" are due to creating a laundry list of "refundable" tax credits. What this means is that if you qualify for a credit worth x amount of money, put you pay less then that amount in taxes, the government refunds you the additional amount in excess of your taxes. The result is that what is described as a tax cut is really just a welfare payment via the tax code. Realizing that the term "welfare" is not a good political starter, his campaign has disguised it as "tax cuts."

According to the the non-partisan Tax Foundation, under his plan, 44 percent of all tax filers would pay no income taxes (up from about 32% currently), with the bulk of these people receiving back more in their annual refund than what they paid in taxes. The result is a $647 billion increase in transfers via these credits over the next ten years to over $1 trillion, or 4 times more then what is currently transferred through "welfare."

Furthermore, these tax proposals have a major problem that conventional welfare programs also have, that being the welfare trap. This is the dynamic that occurs when people who are receiving payments are disincentivized from working more or harder to get off of welfare because doing so would cause the benefits one receives to phase out with more income. The result in that the policy increases the amount of poor and government dependents (or at least reduces income mobility). Similarly, because these tax credits phase out with greater income, the marginal effective rate of taxation on low income workers will become very high under Obama's plan as seen by the chart from the Wall Street Journal (keep in mind this is for only one scenario of tax credits). Why would a low income worker put additional effect in overtime for example, if 35 to 4o percent of that gain would be lost in income taxes and phasing out credits? And that is only the Federal Income Tax. That does not include payroll taxes or state and local taxes. The combined marginal rate would likely be closer to 45 to 55 percent.

-EJB


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Well, EJB, I have to say I'm a little disappointed in the subject of this post. Not because it involves economics (I am slowly learning to love the dismal science) but because you seem to disguise (or are ignorant of) the fact that this is not a WSJ piece. This information and research comes from the AEI, a noted conservative think tank (the authors are AEI "resident scholars"). Thus, I immediately am weary of the validity of its conclusions. However, as a court does when considering a motion for summary judgment, let's presume all facts and allegations to be true and proceed from there.

I will start by linking to these two pages, which I think are fair game, even though they're obviously Obama-campaign-run sites (since you opened the door by bringing in AEI articles). Each page contains various rebuttals and counter-availing considerations to the aforementioned article. Some arguments/considerations stand out, and I'll briefly highlight them below:

1) Let's be REALLY careful when we look at what this chart represents. I know you pointed this out already, but I'd like to reiterate: this involves marginal tax rates (not average tax rates) and it only involves a single, highly specific circumstance, i.e. a household with two wage-earners and two children, one in college and one getting child care. These somewhat drastic marginal rate differences would NOT show up in many other cases. And, as the WSJ article even points out, Obama's tax plan would actually increase the amount of money in pocket for low-income earners.

2) The idea in economics of bounded rationality. Bounded rationality theory simply notes that while most economic theories presume that humans are "hyperrational," there are all sorts of other concerns that make choosing the "rational" outcome infeasible. Bounded rationality's effects become even more noticeable and relevant in discussions of low-income earners. It's all well and good to argue that phasing out tax credits will increase marginal tax rates. Hypothetically, this will create a disincentive. But to then make the leap and claim that this disincentive will actually cause someone making less than $25k to reject a higher paying job is pure conjecture - and, I might add, blatantly counter-intuitive. There are absolutely no empirical studies to back up this theory. Plus, even if it were true, then the effect is ONLY important/magnified at the margins!

3) I won't go into much depth here, but there are plenty of philosophical problems with the "welfare trap" theory - to ground an entire argument on that idea is to build a house of cards. There are also proposed solutions to the "welfare trap" that Obama could then implement - for instance, a guaranteed minimum income or a negative income tax.

4) A public policy argument. Obviously, any tax cut for the middle or lower class will increase marginal tax rates (because they'll be phased out when you move up in tax brackets). So, if we're going to argue that tax cuts for the poor are bad, because it disincentivizes climbing the wealth ladder, is it then necessary to argue the contrary position (namely, that we must INCREASE the incentives for income mobility?) I'm not saying that this necessarily follows, but it seems like it could. This result would be highly problematic because it would involve one of two things, either: a) only cutting taxes for the extremely wealthy (may be a good way to incentivize people to earn more, as if they needed more incentive; but not a good way to increase government revenue); or b) increase taxes on the poor! Taxing poor people at a higher rate means they'll have all the incentive they'll need to get out there and work! In fact, let's just cut welfare altogether...the resulting increase in deaths and decay among the poverty-stricken will surely incentivize income mobility! No longer will anyone bask in the glory of being welfare-dependent. Which brings me to...

5) Lost in all this economic talk is the simple fact that Obama's plan would leave people at a given low level of income significantly better off.

And finally:
6) Marginal rate incentives are stressed entirely too much, especially when compared to effective rates, which have plenty of efficiency implications (considering that they describe what the private sector spends compared with the public sector). The chart itself, I believe, is rather meaningless.


EJB, I don't expect you to respond to each and every point and I don't actually disagree with the thesis of the original post. I have simply found and compiled any and all counter-arguments that I could find and submit them for your disapproval. Once again, I am playing out of my league, and I fully expect corrections that help me to see the errors of my post.

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First off, the article linked IS from the Wall Street Journal; however, the chart that I posted (also from the WSJ) used data from AEI. But in this line of attack JSK comes very close to responding in ad hominem. He is attacking the messenger (AEI), not the message. But then after placing that out there for the readers, he covers himself by saying essentially that we should assume it is factual. It is true that AEI is a think tank with ideological leanings, but so are all of them; it still produces academic work where methods are disclosed and information is sourced. This is far different from most campaign sites that JSK suggests are similar. The link regarding the deficit estimates for example borrows heavily from work from the Brookings Institute and the Urban Institute, both left leaning think tanks, though I did not discriminate there. Furthermore, as JSK points out (and he makes note that I also mentioned it), the chart is for one scenario. However, if you read the linked article, one can easily put together a whole host of likely combinations of proposed credits that a "normal" family would qualify for, and the results will all be similar even if they vary by degree.

But now lets actually address some argument. My post basically had two parts following the discussion of the effect to the annual deficit. The first (and what the WSJ article focused on), was not an argument that these proposals would not have the direct effect of putting more money into lower income workers pockets. In fact, I think it is quite clear that I am saying it will do just that in that I am calling these proposals to be similar to welfare. The point of that discussion was not that it would or would not directly harm or benefit a poorer household, but that a huge growth in welfare programs is being disguised as "tax cuts." It would seem that JSK is making a counter to an argument that was not being made.

The second component is what JSK spends most of him time discussing. This is the notion of the "welfare trap" and the associated chart. Essentially the argument against this effect happening is that it ignores total income and that it is crazy to think that one would turn down a job advancement because of a large marginal rate. His argument that total income or total tax burden matters more then marginal rates with regards to behavior is a common one; however, it bucks the entire theory behind behavioral decision making. People make decisions on the margin; when the marginal benefit (or at least the perceived benifit) of performing an act exceeds the marginal cost (once again, the perceived) of performing it, one will engage in that act. This profound understanding came along in the 1870's in what would become called the Marginal Revolution . If you are interested in reading about the basic economics of this beyond what I put here, fell free to read the link (side note: I wonder if Marx, who like Smith based his thinking under the Labor Theory of Value would have had different reasoning had he lived 30 years later).

This marginal benefit/ marginal cost mechanism answers the classic Water/Diamond Paradox. That is why is water, which is essential to existence cost virtually nothing, but diamonds, which have virtually no practical purpose valued at such a high price?:

Human beings cannot even survive without water, whereas diamonds were in Smith's day mere ornamentation or engraving bits. Yet water had a very low price, and diamonds a very high price, by any normal measure. Marginalists explained that it is the marginal usefulness of any given quantity that determines its price, rather than the usefulness of a class or of a totality. For most people, water was sufficiently abundant that the loss or gain of a gallon would withdraw or add only some very minor use if any; whereas diamonds were in much more restricted supply, so that the lost or gained use would be much greater.

Similarly, when one is making the decision to work an additional amount, pursue a higher paying job, and so on, people base their decision not on the total income (price) that is received for their total labor, but rather the marginal benefit relative to the marginal cost of that additional action. It is true, as JSK states via Bounded Rationality, that people are not always making a calculated decision, but over time peoples actions through experience drift into this equilibrium. Think for a moment your decision to purchase a second hamburger after eating the first. You are not doing a detailed analysis of the marginal benefit to you in buying another, but through past experience, you know how fulfilling that second burger will likely be, and you make the marginal decision to stuff your self or not when you compare it in your mind to the cost of doing so.

I will give a historical example of the "welfare trap" due to the reduction of marginal benefits of working to support my case as well as a personal anecdotal example. The welfare reform of 1996 was explicitly enacted because the total amount of people on welfare, particularly people who didn't work at all, had been steadily increasing. This is because the program was completely based on meas testing where a family would receive cash and other benefits solely on their condition. So if an unemployed individual started working, then these benefits would phase out, and therefore the marginal benefit of working was greatly reduced. The 1996 reform in general, restricted access to welfare programs to able-boddied individuals who were not pursuing work or further education or training. The relative marginal benefit of working further increased with these reforms. As a paper by a fellow at the left leaning Brookings Institute stated (in case you still don't trust "right leaning" think tanks).

The 1996 reforms have been followed by a major decline in the welfare caseload, big increases in employment and earnings of single mothers, substantial increases in total income of families headed by mothers, and the biggest declines in child poverty since the 1960s.

Now as he points out, some of this improvement can be chalked up to strong economic growth in these years; however, there had been strong economic growth in the mid to late 80's as well and no such effect occurred, so it is pretty safe to say that at the very least a good portion of the improvement was due to these reforms.

Lastly, I bring attention to a personal example. During my last year of high school, i worked a considerable amount. When applying for federal student aide for college I learned that the way the formula worked was once a student surpassed a certain threshold in annual income (somewhere around $4000 thousand at the time if I remember correctly), each additional dollar earned translated into a 50 cent reduction in student aide for the year. Just like the phasing out tax credits that Obama proposes, I had a benefit phase out, which had the effect of raising my marginal "tax rate" to about 72 percent when all taxes were included. So what I did was quit my job two months early and I sat on my butt for the summer. It didn't matter that my total average tax rate for the year was much lower, because I had already made those decisions and it was the marginal rate that effected me at that point. I essentially was effected by the "welfare trap" where a social program benefit (student aide) disincentivized me from working further to benefit myself and in turn society. Marginal rates are important, and I didn't even understand anything about economics at that time in my life. :)

-EJB