Browsing the blog archives for November, 2012.

One more time…The fiscal cliff is not a cliff

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The media’s incessant and dire warnings notwithstanding, the “fiscal cliff” is no cliff at all. Judging by some of the recent comments posted and a couple of emails I received over the past few days, I think it’s important to make this clear and simple.

1. The sequester was an abrogation of fiscal responsibility. It was the President’s bad idea but Congress is to blame for going along with it.

2. There is no mandate to raise taxes. Obama won the popular vote by 3%, yet the Republicans hold an 8% edge in Congressional seats. The truth is that Americans are still deeply divided. Both sides are in the same position in terms of public support when it comes to addressing fiscal issues.

3. The real fiscal cliff is the $16 trillion in national debt, not the taxes and “mandatory cuts” that would trigger without “a deal,” as these can be countered with spending in other legislation. Entitlements (social security, Medicare, and Medicaid) comprise 2/3 of the spending, so the cliff will remain until these are reformed, not just tweaked. Cuts in the other 1/3 of the budget are needed to bring Washington back in line with its limited Constitutional role. Negotiating a sound agreement is a good idea, but the deal must be a good one and we must understand that it will not remove the cliff.

If you are convinced that the fiscal cliff is all that the media and many politicians are telling you, then consider the following: We have been told that the taxes and cuts mandated by the sequester will push the economy over the cliff, yet we have also been also been told that a deal containing the same level of taxes and cuts transferred to different wage earners and programs can actually promote economic growth and instill confidence. Transferring tax liabilities from one group of wage earners to another might be good or bad, but the economy doesn’t perform better when high wage earners pay a higher percentage of the same total. This is illogical.

The President and his supporters in the media used the scare tactics when he promoted his $787 billion stimulus package. He won the day and we spend the money, yet the economy has yet to strengthen. Let’s not be fooled again.

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The SOE problem in China

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The Wall Street Journal reported last week that Chinese regulators won’t let ships from a Brazilian miner (Vale) deliver iron ore, citing alleged “safety concerns.” The problem is not safety, but the undue influence of state-owned enterprises (SOEs).

In December 2011, the Valemax Berge Everest—a huge ship 50% larger than the next largest global carrier—unloaded a record 350,000 tons of iron ore in the Chinese port of Dailan in only 55 hours. The head of China’s steel industry association praised the feat, noting that the large ships will cut production costs. But the Chinese Shipowners’ Association blasted the Valemax ships as “a matter of monopoly and unfair competition.” The association’s chairman, Wei Jaifu, is also chairman of SOE China Ocean Shipping Company (COSCO), China’s largest shipping line. Shortly thereafter, China’s Transport Ministry effectively banned the ships, citing a 2-foot crack in the ship’s hull. Experts had examined the crack and found no reason for concern, but this didn’t stop the Ministry from intervening.

The problem here is not safety, but protectionism. Most of the shipyard business Vale created went to a private company that lacked government pull. Vale’s huge ships represent a direct threat to COSCO and other firms in shipping and related industries. Those that are state-owned have the necessary connections to raise safety or other concerns to keep the global competitors out. While privately held companies must compete on factors like price and quality, SOEs have another level at their disposal, government intervention.

This type of government-big business collusion is known as crony capitalism in the U.S. But direct government ownership and control is much less common here, with notable exceptions like Amtrak, the US Postal Service, and GM. China has opened its economy to some extent over the past two decades, but SOEs still control banking, telecom and many other sectors of the economy, making it difficult for non-Chinese firms to get a fair shot at the Chinese market.

Politicians often focus on problems with China over exchange rates and intellectual property rights. These are certainly important issues, but they emanate from a deeper notion that Beijing can and should intervene in global business affairs to protect Chinese firms. Until China is willing to privatize its SOEs it will continue to arbitrarily and unfairly deter global competitors seeking to enter the country.

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Fiscal Cliff 101

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With the election behind us, attention has turned to avoiding the so-called fiscal cliff. Unless Congress and the President reach an agreement, various tax cuts will expire and automatic spending cuts will ensue. These include the 2% temporary payroll tax deduction, the end of the tax cuts passed in the Bush era, and a variety of business incentives. Obama wants a solution based on tax hikes for high income earners, why John Boehner is talking tough about spending cuts and maintaining current rates. There are two major problems here, and neither is the possibility that Obama and Congress can’t reach a deal.

First, sequestration was a bad idea. It simply deferred the last round of tough fiscal decisions until after the election. Our financial situation is dire because politicians have refused to consider long term effects and unintended consequences of policies. They’ve kicked the can down the road and Americans have rewarded them with reelection. According to Bob Woodward, the sequestration was Obama’s idea, but some of the blame extends to the Republicans in Congress for accepting the idea. No Congress should ever vote on income tax rates that expire on a given date. Representatives should have the courage to change the rates and let future Congresses revisit them if they wish, but not under the threat of expiring tax cuts.

Second, the REAL fiscal cliff is the coming crisis brewing from the $16 trillion and rising in national debt. Those fretting about the end-of-year fiscal cliff act as if some kind of deal will fix our long term budget problems. They act as if making a deal means that Washington is averting the crisis. This is simply not true.

It was just reported that President Obama is seeking $1.6 trillion in new revenues over the next decade, twice what was discussed in the summer of 2011. This constitutes $160 billion per year when deficits in excess of $1 trillion are forecast for the coming four years. Of course, tax hikes on job creators always create a drag on the economy and any 10-year deal is meaningless because its terms will be revisited after the next elections anyway. These realities aside, avoiding the current fiscal cliff does nothing to address the real problem.

The bottom line is simple:

1. Washington spends too much and serious cuts must be made. Some will be unpopular, but Congress has that responsibility. The federal government is involved in areas well outside of its Constitutional boundaries.

2. The tax system needs to be simplified and flattened. Punitive taxation of successful Americans balanced with redistribution schemes like EITC for low wage earners creates perverse incentives for Americans to be less productive. Washington needs to get out of the social engineering business and allow Americans and businesses to make their own decisions free from federal intervention.

Given the fact that Obama vigorously opposes both #1 and #2, it is highly unlikely that any deal to avoid the “cliff” will be much better than going over it. My fear is that Boehner will give in, taxes will be raised, and many Americans will actually believe that our fiscal situation has improved.

My advice to the Congressional Republicans is simple: Put a bold plan on the table that addresses #1 and #2 and insist that Obama negotiates within that framework. Addressing these issues can create jobs and ultimately raise revenues, and eliminating a wide range of tax deductions (something important to Obama) can be part of the deal. If talks stall, let the next Congress take up the issue in January. It’s time that Republicans take a stand. The real fiscal cliff is not too far around the corner and we must take serious measures to address the real problem.

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4 More Years

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I wish Mitt Romney wasn’t a moderate and could have drawn a clearer distinction between himself and President Obama. I wish he had been more assertive in the last debate, especially on Libya. I wish Sandy would have hit after the election. I wish I knew what Chris Christie was thinking.

All of this aside, the Republican party has two choices going forward: (1) To accept the presumed national shift to the left and seek to nominate more moderate candidates or (2) to seek party leadership and potential presidential candidates from real, articulate, Constitutional defenders of liberty.

The mainstream media will tell us, once again, that the problem is extremism. The first option is more practical, they say, as we must understand the new political realities. The problem with this approach is that it simply doesn’t work. Obama moved to the center to beat Republican moderates McCain and Romney in the last two elections. Granted there were other factors involved in these contests, but there is little evidence to suggest that moderating the party will win favor with the electorate.

To me, the second option is a no-brainer. The problem with moderates like McCain and Romney (and Christie) is their lack of a strong core compass. They adjust their tactics to the situation, appearing both conservative and liberal at times. They are seen by some as pragmatic problem solvers, but their solutions are often lukewarm. They don’t consistently excite voters because nobody really knows what they stand for.

Before I proceed, for the record, I think Romney is a decent man with strong leadership skills. I did not support him in the primary but I did so in the general election. I’m not throwing him under the bus, but we must face reality.

Also for the record, I am not a registered Republican. I usually vote Republican by default, but the party has drifted away from its roots. I don’t even like the word conservative these days because it doesn’t quite mean what it used to.

Here’s the fundamental problem as I see it. Roughly 45% of Americans will vote Democrat and 45% will vote Republican in any given national election. The remaining 10% decide each election. Many pundits presume this group to be “moderates” and candidates often shift to the middle to court their votes after the primaries. I believe many in this group are not necessarily looking for a middle-of-the-road candidate, but instead seek someone who can deliver a real vision, a complete and coherent package that will advance the country. True “conservatism” that includes a genuine Constitutional basis and seriously limited government is the alternative to the current malaise. Moderate candidates like Romney offer more competent leadership and a move in the right direction, but nothing more.

The US is $16 trillion in debt with a majority of Americans relying on various government programs. The list is a long one, including entitlements for which citizens have been taxed directly such as Social Security and Medicare, various forms of income redistribution such as SNAP and EITC, and middle-class entitlements such as Pell grants, mortgage deductions and Chevy Colt subsidies. I’ve met a number of people who understand that our situation is unsustainable, but they’re only willing to “sacrifice” their pet programs if others get slashed as well. They see modest cuts like Romney proposed as making little difference over the long term. Unless they see the prospects for serious reform, they will opt for the status quo and kick the can down the road.

We’ve got some time to reflect on this, but we shouldn’t forget that the battle for liberty never stops. Political and economic ignorance remains widespread. We don’t elect kings and we must never stop demanding accountability from all of our elected officials.

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