Capital Gains & Games

Antiquated Air Traffic Control and Fedex v. UPS

2 hours 14 min ago

Today, the Senate turned to the Federal Aviation Administration authorization, H.R.1586. The last four-year authorization expired September 30, 2007. What caused this 2½ year delay? Congress couldn't agree on how to apportion the excise and ticket taxes to pay for a desperately needed modernization of the air traffic control system. Your car has GPS. Your phone has GPS. Commercial airliners have GPS, but the air traffic control system still relies on radar and radio position reports. That costs billions of dollars in extra miles traveled every year. The airlines correctly believe they pay more than their fair share of the costs, but private pilots (I used to be one.) have more political clout and refuse to share more costs. Then there's the problem of Memphis, TN-based Fedex's avoidance of a union for its workers, which puts it at an advantage over its main competitor, unionized United Parcel Service. The House version of H.R.1586 would apply existing labor laws equally to both companies, but that prompted Tennessee Senators Lamar Alexander (R-TN) and Bob Corker (R-TN) to hold up the bill. They relented when they concluded they have the votes to kill the bill before it goes to President Obama if it includes the Fedex provision. Airline objections to increased inspections of foreign repair shops are another hangup, as is a provision to publicize pilot performance information, and the killer -- your yet to be enacted right to food, water, and a bathroom after getting stuck on the tarmac for 3 hours. As always, the traveler in me must trade off with the economist in me weighing the additional costs. I haven't done the analysis, but the fuel and time savings from improved air traffic control would sure seem to outweigh the costs. 

What It Would Mean to Default on the Debt

2 hours 40 min ago

The other day I commented on a blogger's suggestion that it might be better to default on the debt than raise taxes. In the course of doing some research on debt default I came across the following article in which a friend of mine, Chris Whalen, actually made a serious argument for defaulting on the debt. It's too good not to share. BB

 

With Debt Burgeoning, Could the U.S. Default? Kathleen DayWashington Post June 14, 1992. pg. H.01   Picture Uncle Sam telling you what a number of foreign governments have told their creditors and bankers: "I'm not going to pay you."  Unthinkable?  Not to R. Christopher Whalen, 34, a Washington-based financial consultant who worked for three years as an analyst in the foreign department of the Federal Reserve Bank of New York.  Whalen, whose heroes include economists Milton Friedman and the late F.A. Hayek, doesn't like the prospect of the United States defaulting on its debts. But he says defaulting is preferable to a long, painful slide that will only postpone the day when the United States returns to economic and financial health. By doing it now, he contends, the nation could swallow all the bitter medicine in one big gulp, and get on with rebuilding.  "Let's just admit the reality that the {national} debt will never be repaid, or will be repaid in inflated dollars, and start over," he said. "It would be beneficial to the economy because you would cripple the government's ability to borrow. I think that would be wonderful because then the government would have to go to the people every time they wanted to spend money."  He added: "If it's good enough for Brazil and Mexico, why not us? After all, doesn't the world owe America one debt forgiveness?"  How could a default work?  According to Whalen, the government could announce that it would no longer pay interest to holders of U.S. Treasury bills, notes and bonds. Then the Federal Reserve Bank system could agree to buy back these securities for their face value, in cash. To do this, the government would have to print as much as $2.7 trillion, the portion of the total national debt now held by foreigners, investors and anyone other than the government or its agencies.  Such a measure would be extremely painful. The printing of reams of money would, in the short term, cause unprecedented inflation. Millions of Americans, especially such groups as college students and the retired, would have to forgo the money they count on from government fixed-income securities. Insurance companies, which are big holders of long-term bonds, would find their assets drastically devalued.  Nevertheless, Whalen believes that given the inability of Congress and the Bush administration to deal with the continuing deficits, it would be the quickest way to put the U.S. economic house back in order.  The national debt would be gone, and the government wouldn't have to borrow several hundred billion dollars a year to pay the interest on it. The government would have to balance the budget - taxes would have to equal spending - because nobody would be willing to lend it money for the time being.  Longer term, the clean slate could help business and promote rapid growth by creating a climate of low inflation and low interest rates. As confidence in the U.S. government returned - it might be buttressed by its bold action, once the initial shock of what it had done had passed - some federal borrowing might be possible. But it would be for productive investments, such as education, infrastructure, science and space exploration, not for repaying interest.  In short, the risk of economic turmoil would be outweighed by action that "would wake up the nation and tell taxpayers what the story is," Whalen said. "The only way politicians have gotten away with this is that the consequences of over-borrowing have come out in dribs and drabs."  One result of the steadily rising annual interest payments on the federal debt is a core rate of inflation of about 3 percent a year, Whalen contends. When the government goes in debt to fund current spending, it makes the economy run faster than it would if it couldn't borrow. Excess dollars chasing goods and services causes inflation.  In a default, the country takes the entire inflationary impact of its excesses in one blow, instead of spreading it out over many years. Over 15 to 20 years, Whalen believes, the current inflation rate will have the same ruinous effect on the U.S. credit rating as a one-time default now would have.  "If the government doesn't move soon for an orderly reduction of debt, we're headed for a repudiation of interest," he said. "It'll be Third World economics time. It would destroy a lot of wealth. It would put us in the ranks of Brazil."  Such talk of default is dismissed as dangerous and irresponsible by most Washington fiscal experts and economic policy makers. But on Tuesday, House Speaker Thomas Foley (D-Wash.) uttered the "D" word - not to endorse the idea but to describe the possible consequences of a balanced-budget amendment.  "It could create problems with forfeit," he said on the Public Broadcasting Corp.'s McNeil-Lehrer News Hour. "I should say a problem in the sense of not meeting our obligations, and we {could} have a default on U.S. government obligations in a year when Congress and the president could not come to agreement and not meet the obligations that the full faith and credit of the United States is pledged to."  James Dale Davidson, chairman of the National Taxpayers Union, wrote in the Wall Street Journal recently, "If we continue to ignore this degraded balance sheet and let the deficit skyrocket, the day will come when the escalating cash demands of government will inevitably overwhelm credit markets, resulting in a downgrading of all government securities."  Davidson said that the Social and Economic Congress of Japan has warned Japanese investors that the U.S. Congress may default on the national debt.  A less drastic step than declaring an outright default, according to Whalen, would be for the government to impose a higher federal tax on the interest earned on Treasury securities, recouping some of the interest costs without officially announcing a default.  In fiscal 1991, the U.S. government paid out $196 billion in interest on the $2.7 trillion in debt held by the public. This annual budgetary expense will grow to $280 billion by 1997 under present scenarios. (Not included in this liability are outstanding U.S. government guarantees on pension funds, student loans and home mortgages.)  The annual interest payments on the debt account for nearly half of this year's estimated budget deficit, and are the third-largest item in the federal budget after defense spending and Social Security.  Some of Uncle Sam's debt is at extremely high interest rates - up to 15.8 percent. When interest rates were at record levels in the early 1980s, the U.S. government-issued bonds had to offer such premiums in order to finance the deficit. Unlike many borrowers, the U.S. government cannot refinance most of its long-term loans at today's lower interest rates, because that would upset the financial markets.  The creditworthiness of the U.S. government, which enables the Treasury to pay the lowest market interest rate available to its creditors, has been a given for decades. Treasury securities, long considered the closest thing to a risk-free investment, serve as the benchmark for stock, bonds and currencies. To undermine faith in the U.S. Treasury would risk global financial instability. Therefore, most observers agree that a repudiation of the debt is unlikely in the foreseeable future.  The day the government defaults on even a penny promised a bondholder, said Edward Yardeni, chief economist for C.J. Lawrence in New York, "that's the day you'd be talking about the U.S. being in the same camp as Brazil. Before we'd let that happen we'd raise the tax on gasoline by $2 a gallon."  Yardeni said the bond market carries more clout than other special interest groups, and wouldn't let it happen. For if the government defaulted on interest, bond prices would collapse and interest rates would skyrocket and that would induce a depression. Nonetheless, he said, "There's a compounding effect of interest, so something has to happen."  "I don't think a default is likely," agreed James Grant, editor of Grant's Interest Rate Observer and one of Wall Street's most pessimistic analysts of the stock market and economy. But some of Grant's views echo Whalen's. "Is the state of the public financing reaching some serious point of no return? Yes," he said.  Where Grant parts company with Whalen is in his belief that "government will conjure up some way to pay... ." He suggests jestingly that the government in theory could repay its debts with assets other than dollars - failed savings and loans or cans of tuna fish included.  Default and debt restructuring has been a favorite tool for the likes of Donald Trump, Latin American countries and others who borrowed too much money in the 1980s. The decision of Bridgeport, Conn., to file for bankruptcy last year showed that local governments are not beyond drastic measures to cut expenses.  Whalen takes exception to the idea that defaulting on interest payments would throw the markets into intolerable chaos, dismissing that as a "quaint notion of the 1950s" that has been overwhelmed by the depth of the country's current economic woes.  The U.S. government's vaunted creditworthiness has had its negative side, he suggests, enabling the country to borrow excessively from investors who didn't ask tough questions about the underlying health of the country's finances.  "Debt is bad. It's always been bad," Whalen said. "And public debt is especially bad because it carries the pernicious illusion that the state can carry it forever."

Addendum

I subsequently came across an article in The Freeman and another article by Murray Rothbard that also seriously advocated repudiating the debt.

"The Great Prostate Mistake"

3 hours 46 sec ago

Richard J. Ablin is the University of Arizona research professor who discovered the prostate-specific antigen (PSA) test in 1970. Today, in a New York Times op-ed, he decried the misuse of that test by health care monopolies to drive up profits with promises of catching prostate cancer early. First of all, the test can't detect cancer. Screening most men over age 50 costs over $3 billion a year, but has been proven in two recent studies to have little or no effect on life expectancy. Only 16% of men will ever be diagnosed with prostate cancer and only 3% will ever die of it. A European study concluded 47 men suffer grievous treatments that result in loss of sexual activity and incontinence for each life saved. Professional associations are beginning to recommend against PSA tests, but not those captive of the drug companies. Ablin concluded, "I never dreamed that my discovery four decades ago would lead to such a profit-driven public health disaster. The medical community must confront reality and stop the inappropriate use of P.S.A. screening. Doing so would save billions of dollars and rescue millions of men from unnecessary, debilitating treatments." The profit motive in competitive markets has proven benefits, but, in monopolistic markets, it leads to uncontrolled costs and, in this case, to human suffering.

Health Care, Not Reconciliation, Is The Issue

9 March 2010 - 5:10am

My column from this morning's Roll Call explains why reconciliation, a subpart of the congressional budget process, and a sub-subpart of the legislative process, isn't what we should be arguing about.

Can We Please Stop Talking About Reconciliation?

My fellow Roll Call columnist Norman Ornstein was one of the authors of a truly excellent chart on reconciliation that appeared in the New York Times on Sunday.

Norm, and his two co-authors, Tom Mann and Raffaela Wakeman, show in an almost full-page display that reconciliation has been used repeatedly since 1981 and is anything but the, in their words, “power grab” that some are trying to get us to believe it will be if it is used for legislation related to health care reform.

They also show that reconciliation has been used when Democrats and Republicans were in the majority; to increase and decrease the deficit; to increase and decrease spending and revenues; and to create, expand and decrease programs.

No matter how much you might prefer it to be otherwise, this is not partisan opinion, beliefs or analysis. They are indisputable facts that are neither new nor newly discovered.

So let me say this as directly as possible: Enough about reconciliation. It absolutely doesn’t deserve the attention it’s receiving.

Why is anyone talking so much about a subpart of the Congressional budget process (and a sub-subpart when you add in the Byrd Rule) when the issue that really needs to be debated in depth is health care reform?

I am a budget process wonk. I have spent much of the past three decades speaking about and analyzing the ins and outs of the Congressional Budget Act (which created reconciliation) and its successor budget laws. The more people talk about reconciliation and want information on it, the more likely they are to quote me in stories and interview me on television and radio. In other words, the fact that reconciliation is an issue is good for my business.

When someone like me, who has a personal interest in reconciliation being a big controversy, says it’s a side issue that not only doesn’t merit the attention it’s getting but shouldn’t be an issue at all, you have to understand both how painful it is to say and how seriously the point should be taken.

I had this same basic argument a year or so ago with someone who insisted that the United States should have a capital budget. He was willing to fight to the death to change the way the U.S. treated capital expenditures. To sell his point he prepared white papers, talked one on one with countless people in the House and Senate, participated in seminars and persuaded think tanks to include it as a high priority on their agendas.

I told him at the time that the real issue wasn’t the budget treatment of federal capital purchases; it was that the U.S. was underinvesting in infrastructure. But instead of spending his time talking about the benefits of the change that he wanted, for example, on what it would mean if roads could be driven more quickly and safely so that people would get home from work earlier and spend more time with their families, he focused on accrual accounting for the federal government.

Even I, a budget process aficionado who served on a presidential commission on capital budgeting, found that boring and largely beside the point. And, not surprisingly, the issue died.

The same thing is happening now with reconciliation and health care.

There are three reasons why the debate should not be whether this is an appropriate way to adopt legislation.

First, as Norm and his collaborators showed quite definitively Sunday and what we actually knew long before the chart was published, that issue was settled a long time ago.

Second, the most important question is not about the process; it’s about the changes in health care that would be put in place and, like the safer and faster ride home that might happen with better roads and rail, what it would mean for the way we live.

Third, debating the propriety of using reconciliation is a great way to turn off the interest in health care reform outside the Beltway. For most people, “reconciliation” is something you do when you get your monthly checking account statement or what you try to do when you go to a marriage counselor. Outside that it has no meaning.

Those for and against a health care bill may have made a huge mistake in focusing so much of their energies on reconciliation. Not only is it ultimate inside legislative procedure roughly akin to trying to make an issue about Section 302b allocations (Trust me, if you don’t know what these are, you don’t need to worry about them), it effectively means that a good part of the outside interest in the issue will end if the procedure is used, a bill is enacted and the world doesn’t come to an end.

Meanwhile, those who support changes in health care have been engaging on a highly technical procedural issue and, therefore, giving it unnecessary credence. They have also been missing an outstanding opportunity to talk about what the changes will mean to the average voter.

It’s hard to imagine that the average voter will support health care reform because reconciliation was or wasn’t used to put it in place.

Krugman and "Fiscal Scare Tactics"

8 March 2010 - 9:43pm

     I don’t like to start fights with Nobel prizewinners in economics, especially with one who is usually right, but I have a bone to pick with Paul Krugman on the topic of “fiscal scare tactics.”      For months now, Krugman has argued that Republicans and their lapdog followers in the press have been hyping the dangers posed by soaring federal deficits and debt.      “There’s no reason to panic about budget prospects for the next few years, or even for the next decade,” he wrote in his Times column on February 4.   Given the magnitude of this recession, Krugman argues, we absolutely should be running huge deficits in order to prevent an even bigger cataclysm.       Last Friday, Krugman followed up with a post on his blog entitled “Debt is a political issue.” There he explained that the Federal debt, now approaching 60 percent of GDP, wouldn’t pose a huge burden even it jumped to 100 percent of GDP. After inflation, the Treasury’s real interest rate is only about 1.5 percent.  If you do the arithmetic of debt service, that really does seem to suggest that debt isn’t a problem….All the government has to do is pay the real interest on it. So suppose that we add debt equal to 100 percent of GDP, which is much more than currently projected; servicing that debt should cost only 1.4 percent of GDP, or 7 percent of federal spending. Why should that be intolerable?      Now, I agree with Krugman’s broader arguments.  No serious economist thinks it would be a good idea to slash spending and deficits yet. At best, that would choke off the feeble recovery. At worst, we would plunge back into a deep recession.     I also agree that Republicans, most of them latter-day converts to fiscal piety, are hypocritically whipping up hysteria to advance two dubious goals: 1) discredit President Obama, even though he inherited today’s mess from Bush; 2) attack  Social Security, Medicare and Obama’s health care reform as threats to freedom-loving Americans.      But Krugman doesn’t stop there. Perhaps because he’s convinced this is a political battle, he resorts to gimmicky arguments to make a simplistic case that there really isn’t much of a deficit problem at all.       As a result, I think he undermines his credibility by sounding like a propagandist rather than the truth-teller he usually is.       Full disclosure: Krugman attacked an article that I wrote on the “debt bomb’’ in the New York Times back in November.   He called it “alarmist’’ to write about the projected surge in interest expense to $700 billion a year by 2019.     But I’m writing today about two more recent pieces. On February 4, he explained why there was “no reason” to panic about the budget for the next few years “or even for the next decade.”      His evidence? The White House projection of $700 billion in annual interest expenses, 10 years from now, would equal only 3.5 percent of G.D.P. “How scary is that?” Krugman wrote. “It’s about the same as net interest costs under the first President Bush.”      Well, no, it’s not even close to the same. Under Bush, that debt burden occurred when the US was just crawling out from the back-to-back recessions of 1990 and 1991.   As Krugman would say, that’s exactly when you would want big deficits and, if necessary, high interest payments.      By contrast, the interest-expense projections we’re talking about here --  which come from the White House and CBO -- are for 2020 and assume that we will have enjoyed TEN YEARS of steady economic expansion. That’s exactly when you’re not supposed to have high deficits.      On Friday, Krugman made another dubious comparison. This time, he threw up a chart showing that the United Kingdom’s public debt shot up to 250 percent of GDP during World War II and then plunged back to normal levels after 1950.      If it worked for the Brits, it ought to be fine for us too, right? No, and for a similar reason as before.   In 1950, the British economy had been bombed almost to oblivion.   By definition, the debt-GDP ratio was incredibly high because GDP was incredibly low. With the war over, GDP had nowhere to go but straight up.   It was the absolute perfect moment to have high debt.       The United States is in almost the opposite situation. Our debt is now approach 60 percent of GDP and it could approach 80 percent by 2020. But again, that would be after 10 years of steady growth.        To cement his case, Krugman also argued on Friday that the Treasury’s cost of borrowing is incredibly cheap. Real interest rates on 10-year bonds, after adjusting for inflation, are only about 1.5 percent. What’s so scary about that?      The trouble, of course, is that interest rates are heading up. If everything goes perfectly and the economy recovers without a surge of inflation, the betting is that nominal 10-year rates will top 5 percent in a year or so --  3 percent, if you stick with “real’’ rates and discount for inflation.      The outlook gets a lot uglier if things don’t go so swell. If foreign investors get nervous, or inflation expectations come unhinged, or the rating agencies knock down the U.S.’s AAA rating, it’s anybody’s guess what kind of a risk premium gets attached to US borrowing.      Krugman admits this.  “If bond investors start to lose confidence…. they’ll demand higher rates, which requires much larger primary surpluses, and you can go into a death spiral.”     That’s what worries a lot of smart people who aren’t Republican charlatans but are worried about deficits.  They don't want to slash this year's deficit or next year's.  They want to see a credible gameplan over the next five to ten years for regaining control over what the CBO flatly describes as the current “unsustainable’’ trend.       I have to believe Krugman thinks the same thing. But because he’s so worried about Macchiavellian fear-mongering by Republicans, he ends up sounding less than honest himself.                   

 

David Malpass, U.S. Senator?

7 March 2010 - 9:52pm

I just received the following e-mail from David Malpass, former chief economist at Bear Stearns. I've know him for at least 25 years; we worked together at the U.S. Treasury Department. I wish him the best of luck.

Dear Friends and Colleagues,

As many of you know, I believe strongly in our country’s future, but have been dismayed at the decisions Washington has been making and their impact on New York state.   The problems go across the board – astronomical debt, out-of-control spending and taxes, federal decisions that undermine our security, health care legislation that would appall the drafters of the Constitution, and more.

As a result, I’ve been exploring a run for the U.S. Senate seat held by Sen. Gillibrand and wanted to give you an update.   I'm thrilled to say that we are making great progress on several fronts:  I'm assembling a top-notch team, we're reaching out to party members and county chairmen around the state, and we're taking the legal steps necessary to launch this huge effort in coming days.

In the past month, my motivation to run has intensified—not only because of the great reception I've been getting from family, friends, longtime colleagues and new supporters around New York, but also because I believe the Obama administration has defiantly and wrongly continued to move our country down a perilous path for New York and the nation. 

I’ll be writing you more in coming days about the issues and the campaign.   It’s going to be a hectic eight months, and I will deeply value your views and encouragement throughout. 

Best regards,

David Malpass

The Definitive Word On Reconciliation

7 March 2010 - 10:48am

This almost full-page chart (click on the multimedia box) from today's New York Times (way too big to reproduce here) by Congress experts Norm Ornstein, Tom Mann, and Raffaela Wakeman answers virtually every question there is to ask about the past uses of reconciliation. 

The chart shows that, as I posted on February 28, reconciliation has been used when Democrats and Republicans were in the majority; to increase and decrease the deficit; to increase and decrease spending and revenues; and to create, expand, and decrease programs.

In other words, as far as reconciliation and health care is concerned, move along; there's nothing see here.

What is the National Debt?

7 March 2010 - 9:58am

 My Forbes column this week tries to answer the question. BB

It's a rare public opinion poll these days that doesn't show the national debt near the top of Americans' concerns. Huge budget deficits as far as the eye can see are a source of great worry, encouraging many people to join the so-called tea party movement to demand fiscal responsibility. President Obama has responded by asking for a freeze on nondefense discretionary spending, and appointing a commission to study the deficit and make recommendations for reducing it.

  Before we can take meaningful steps to control the debt--or even understand its true cost and effect on the economy--we first have to understand what it is. At its most basic level, the national debt simply consists of all the federal deficits in history minus budget surpluses. For fiscal year 2009, which ended last Sept. 30, this amount came to $7.5 trillion.  Obviously this is an astronomical sum. But it really tells us almost nothing unless we look at it in context. Economists generally look at the debt in relation to the nation's total output of goods and services, which is the gross domestic product. The debt came to 53% of GDP last year, up from 40% the year before and 35% in 2000, but down from 109% at the end of World War II.  Another way of looking at the national debt is as a share of total credit market debt, which includes home mortgages, corporate debt, credit card debt and so on. In 2009 the national debt equaled 22% of total credit market debt. This was up from the 17% to 18% level that prevailed throughout the 2000s, but is actually down from the level that prevailed during most of the postwar era. In 1950 the national debt was more than half of all credit market debt, in 1960 it was about one-third and it was more than one-fourth in 1995.  Throughout most of the postwar era the national debt fell steadily as a share of GDP. This was partly because the economy grew faster than the debt, but also because inflation eroded the value of the debt. The $250 billion debt that existed at the end of the war would have been $2.3 trillion if calculated in today's dollars. By the mid-1970s, the real (inflation-adjusted) debt had fallen by 40% even though the nominal debt rose more than 60%.  Another important issue is the gross debt vs. the debt held by the public. This confusing distinction exists because for some years the federal government has taken in more in Social Security payroll taxes than needed to pay immediate benefits. By law this surplus is invested in special Treasury securities that are part of the debt subject to the debt limit that Congress must raise from time to time.  At the end of 2009 the gross debt was $11.9 trillion, $4.3 trillion more than the debt held by the public. Although many people get excited about this figure, it is in fact economically meaningless. The Treasury securities held in government accounts really amount to nothing more than budget authority permitting the Treasury to in effect use general revenues to pay Social Security benefits once current Social Security tax revenues are insufficient to pay current benefits, something that will happen in the year 2015, according to Social Security's actuaries.  Another confusion is that the Federal Reserve is treated as part of the "public" when debt held by the public is calculated. This is awkward because the Fed is part of the government and holds vast quantities of Treasury securities, with which it conducts monetary policy. (When the Fed buys them it increases the money supply; when it sells them it reduces the money supply.) At the end of fiscal year 2009, the Fed owned about $900 billion in Treasury securities. (The Treasury pays interest to the Fed on these holdings, but the Fed then gives almost all of it back to the Treasury.)  As big as these numbers are, they really only touch the surface of the federal government's indebtedness. The full scope of that appears annually in something called the Financial Report of the United States Government. The latest report was issued Feb. 26. According to it, in addition to the national debt, the federal government owes $5.3 trillion to veterans and federal employees. But the really big debts are those owed by Social Security and Medicare: Over the next 75 years, the federal government has promised benefits for these two programs in excess of anticipated payroll tax revenues equal to $7.7 trillion and $38 trillion, respectively.  The Treasury Department estimates Social Security's deficit at 1% of GDP over the next 75 years and Medicare's deficit at 4.8%. With federal revenues estimated to be about 19% of GDP in the long run under current law, taxes would have to rise by about one-third to pay all the promises that have been made for just these two programs.  The Office of Management and Budget estimates that in the absence of massive cuts in Social Security, Medicare and other programs, or an equally massive tax increase, the national debt will rise to 77% of GDP in 2020, 100% of GDP in 2030 and more than twice GDP by 2050.  Economists are divided on the point at which the federal debt becomes a meaningful burden on the economy. A recent paper by economists Carmen Reinhart and Kenneth Rogoff suggests that historically growth has not suffered significantly until debts reached 90% of a nation's GDP.  Some Pollyannas, like my friend Larry Kudlow, think we can just grow our way out of the debt by cutting taxes. But this is not really possible given the magnitude of our problem. First, increasing real growth doesn't have as much effect on the debt as one might imagine. According to OMB, raising the rate of productivity, the basic component of real GDP growth, by 0.5% per year over the next 75 years only reduces the long-run fiscal gap by 17%.  Moreover, raising productivity even that much would be hard; over the last five years the productivity growth rate has averaged 1.8% per year, so we would have to raise it by one-fourth just to reduce the projected debt by 17%. And we can't very well expect investment to raise productivity very much when the federal budget deficit will be absorbing a huge percentage of national saving, crowding private borrowers out of the market, which will reduce business investment. Lastly, it's highly unlikely that further tax cuts will do much to increase growth when they will add to the deficit and taxes are already at their lowest level as a share of GDP in almost 60 years--more than 3% of GDP below the postwar average. In any case, the biggest problem businesses have today is a lack of customers, not high taxes.  When people talk about growth reducing the burden of debt they are sometimes implying that inflation will solve the problem. If nominal GDP grows faster it doesn't matter whether it's due to faster real growth or higher inflation, many economists think. The problem with that belief is that it assumes that the debt is largely composed of long-term bonds with fixed interest rates.  Unfortunately the portion of the national debt held in the form of long-term securities has fallen over time, and the percentage in short-term securities has grown. As of Sept. 30, 2009, three-fourths of the privately held public debt matures in less than five years. This debt can't be inflated away because investors will demand higher interest rates to compensate for inflation when it rolls over, which will raise federal spending on interest payments. Also a growing portion of the debt is now indexed to inflation. Known as Treasury inflation-protected securities, more than $500 billion have been issued. Insofar as the additional spending for interest is borrowed, the real value of the debt won't fall very much.  Even in the absence of higher interest rates, growth in the debt will sharply raise the government's interest payments from 1.3% of GDP this year to 3.5% in 2020, 4.5% in 2030 and 10% in 2050. At that point half of all federal taxes will be going just to pay interest on the debt, which by law stands first in line before all other claims.  Another problem is that almost half of the debt held by the public is now owed to foreigners, up from 31% in 2000 and a historical level of less than 20%. Foreign investors will be concerned not just about inflation, but the exchange value of the dollar because all of our debt is denominated in dollars. If they fear that the dollar will drop against their currency they may demand an even higher interest rate as compensation, or insist that the Treasury issue bonds denominated in foreign currencies, which will shift all the foreign exchange risk to the taxpayer.  Recently some foolish bloggers have suggested that it would be better to default on the debt than raise taxes. That would, of course, cause tremendous hardship for millions of Americans because some $800 billion in Treasury securities are owned by private investors, almost $700 billion are owned by mutual funds, more than $500 billion are owned by state and local governments and more than $300 billion are owned by pension funds, among others. I tend to think that they won't take too kindly to the idea that raising taxes would be worse than paying them the money they are owed. In the end the debt must be paid, and we will have to raise taxes and cut spending to make sure it is.

 

The Essence of Teaching, and Training Better Teachers

7 March 2010 - 7:54am

Elizabeth Green has a must-read feature in this weeks' New York Times, "Building a Better Teacher."  There are several worthwhile parts focusing on effective techniques, but I particularly enjoyed the discussion of what makes teaching different from learning:

Mathematicians need to understand a problem only for themselves; math teachers need both to know the math and to know how 30 different minds might understand (or misunderstand) it. Then they need to take each mind from not getting it to mastery. And they need to do this in 45 minutes or less. This was neither pure content knowledge nor what educators call pedagogical knowledge, a set of facts independent of subject matter, like Lemov’s techniques. It was a different animal altogether. Ball named it Mathematical Knowledge for Teaching, or M.K.T. She theorized that it included everything from the “common” math understood by most adults to math that only teachers need to know, like which visual tools to use to represent fractions (sticks? blocks? a picture of a pizza?) or a sense of the everyday errors students tend to make when they start learning about negative numbers. At the heart of M.K.T., she thought, was an ability to step outside of your own head. “Teaching depends on what other people think,” Ball told me, “not what you think.”

Read the whole thing.

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Are Republicans Driving Me Mad?

6 March 2010 - 6:12pm

 Daniel Gross thinks so. BB

 

Fiscal Follies March 04, 2010 By Daniel Gross  Some people have ideas about how to change things in Washington. And some people like to give the appearance of having ideas about how to change things in Washington. For example, Reps. Mike Pence and Jeb Hensarling in Wednesday's Wall Street Journal laid out a plan for recapturing the political and moral high ground on spending and, by the way, saving the nation from impending fiscal collapse. Don't raise taxes. Simply enact a Constitutional amendment. "This amendment would limit spending to one-fifth of the economy (our historical spending average since World War II). The limit could only be waived by a declaration of war or by a two-thirds congressional vote." If spending were to come in at a level of 21 percent of GDP in a particular fiscal year, the Constitution would require Congress to reduce spending by 1 percent of GDP—about $150 billion or so based on 2009's figure. It sounds like a great idea. But Bruce Bartlett, the former Reagan Treasury official who was driven to something resembling madness by his ex-party mates' fiscal lunacy, fillets the proposal on his blog. The gross-domestic-product figures are continually being revised, and fluctuate from quarter to quarter. So, at any given moment, it would be difficult to get a precise measurement of what 20 percent of GDP is. And if there's a year in which the economy unexpectedly shrinks by a few percentage points (as happened in 2009) Congress would be required to go back and hack at spending it had already approved—in the midst of a recession. But here's what really make this a howler. Such an amendment would have real-world consequences. Congress would have to figure out which programs to cut, and which to preserve. And yet the congressmen who are proposing this amendment won't give any suggestions as to which programs and spending they'd actually cut. Consider: in 2009, when, Pence and Hensarling write, government spending was 24.4 percent of GDP, GDP came to about $14.3 trillion (see table 3 in this  release). To get under the 20 percent limit, Congress would thus have been required to cut $629 billion in spending. That's a lot. Especially when you consider that most federal government spending is mandatory spending—i.e., Social Security, Medicare, Medicaid, food stamps, etc. In fiscal 2010, discretionary spending on areas other than defense amounts to $553 billion. Cutting $629 billion in spending last year would have required zeroing out every single last dime of nondefense discretionary spending and then cutting tens of billions of dollars from defense or entitlements. I e-mailed Mary Vought, press secretary of the House Republican Conference, to see if Reps. Pence and Hensarling had any specific ideas of what to cut. The answer: not really. "That's not what the Spending Limit Amendment is about," she e-mailed back. The congressmen do have ideas to reform spending, but the real issue is to focus on the process. "Talking about savings in the budget before we have even decided how much the savings need to be is putting the cart before the horse." Fair enough. But like all the fake deficit hawks out there, Pence and Hensarling are willing to shout loudly about the need to change spending habits but go mute when asked for specifics. It's very difficult to take a proposal like this seriously unless its sponsors are willing to tell us how it would work in practice. An across-the-board spending cut? Across-the-board cuts in everything except debt service, defense, and entitlements? It's kind of like a person who consumes 3,000 calories a day saying he's committed to reducing his daily caloric intake to 1,800 calories—but then refusing to list any of the foods from his current diet that he'd eliminate in order to do so.  http://blog.newsweek.com/blogs/thegaggle/archive/2010/03/04/fiscal-follies.aspx Addendum They appear to be driving Matt Yglesias mad as well (here).

 

Does David Brooks Read Capital Gains And Games?

6 March 2010 - 7:19am

I have to ask.

David Brooks wrote this in the Times on Thursday comparing today's radicals in the Republican Party with the hippies from the 1960s.

Two days earlier, we published this in CG&G comparing today's congressional Republicans with...wait for it...the hippies from the 1960s.

Coincidence?

Dysfunction in Washington Is a Pre-existing Condition

5 March 2010 - 2:35pm

Freshman Senator Michael Bennet of Colorado takes his new institution to the woodshed:

He doesn't go far enough, but at least he's headed in the right direction.  Read more in this dialogue with Ezra Klein.

Changes Coming To Capital Gains And Games

5 March 2010 - 6:22am

March 24th will be CG&G's second anniversary. 

Since Andrew, Pete, Troy, and I joined forces two years ago, the country has gone through a financial meltdown and a recession, the first African American was elected president of the United States, the budget debate has become (to put it mildly) extremely bitter, the New York Yankees won the World Series (Sorry Andrew, I had to include that), and the blogosphere has gone mainstream.  CG&G has been noticed, noted, cited, and criticized, sometimes all at the same time by the same person.

There have been two big additions to the team-- Bruce Bartlett and Ed Andrews -- and both have had an immediate impact on everything from the public discourse to CG&G's numbers.

The one thing we haven't done is change CG&G's look.  That's what's coming. 

Troy is working on a new design that will be cleaner, more modern, and make it possible for us to accommodate the additional advertising requests we're getting.   It will also make it possible for us to do more with audio and video.

The changes will also allow us to address some of the formatting and other issues readers have brought to our attention (Thanks.  Please keep those cards and letters coming in).

The design changes aren't yet final and probably won't be implemented until the end of the month.  But in the meantime, as far as design and features are concerned, what else would you like to see?

 

 

E.J. Dionne Jr. Follows Andrew's Lead

5 March 2010 - 5:34am

This column by E.J. Dionne, Jr. from yesterday's Washington Post uses a word -- lie -- that Andrew didn't use when he posted on the same subject three days, but otherwise it makes the same points about the Republican hypocrisy and propaganda efforts on using reconciliation.  Like Andrew's post, it's a solid and hard-hitting piece.

"Spending" Is The New "Death Tax"

4 March 2010 - 9:36am

I used my first column for The Fiscal Times to take on all those who insist that the only way to deal with the federal deficit is by cutting spending.  Contrary to those who repeat the "it's a spending problem" mantra, spending definitely is not the only issue and spending cuts are not the only possible response.

Take a look.

The entitlements no one is talking about

3 March 2010 - 3:05pm

 

     Here is an article I just published in The Fiscal Times, prompted in part by Leonard Burman's work,  on the staggering size and automatic growth of "tax expenditures" -- tax breaks, for us non-budget mavens.

     Everybody knows that tax breaks -- on everthing from mortgage interest to green-energy projects -- permeate American life and often amount to backdoor government spending.  Republicans love to promote tax cuts, because they seem to strike a blow against Big Government.    Democrats love them because many tax breaks are a way to fund favored social programs.

     What you may not know -- I confess that I didn't -- is that the cost of existing tax breaks rivals the costs of Medicare and Social Security and is growing every bit as fast as the two giant entitlement programs.  In fact, the automatic escalation of tax breaks is very similar to that of entitlement programs.

     Some factoids:

      *Aggregate revenue drain from tax breaks topped $1 trillion in 2009 and actually exceeded the total money collected from personal and corporate income taxes.  By contrast, Social Security outlays are expected to hit $730 billion this year and Medicare to hit $451 billion.

      *The cost of existing tax breaks is soaring three or four times as fast as inflation.  Even if Congress doesn't add a single new one, the automated escalation -- above and beyond inflation --  will cost the government $2.85 trillion between now and 2020.

      *The biggest single tax break, for company-paid health insurance, will drain about $160 billion in 2010 and about $248 billion in 2015.  Those estimates are straight from Treasury, by the way.

      Those are huge amounts of money, but they are almost completely off the public radar.  Public debates about long-term fiscal problems always focus  on the growth of Medicare and Social Security.  That's fine, but it ignores a huge part of the issue.

      Burman, somewhat facetiously, proposes that we simply freeze tax expenditures for three year and cap their growth after that at the rate of inflation.  For practical and political reasons, that isn't going to happen.

       What could be possible, though, is a top-to-bottom tax reform, ala 1986, that wipes out most tax breaks and lowers overall rates.   At  the  end of the  day, the total tax burden would have to go up.   But that's a discussion worth having.

      

     

     

     

 

The New Last Refuge for Scoundrels

3 March 2010 - 11:54am

On the heels of the dopey Hensarling-Pence spending limitation constitutional amendment, which I tear apart here, the so-called Blue Dog Democrats are now supporting a balanced budget amendment (see here and here). When Republican presidential wannabe Tim Pawlenty put forward the same idea a few weeks ago I explained why it was a bad idea here. (Many of my criticisms of the Hensarling-Pence proposal are also valid against a BBA as well).

  I’m starting to think that Samuel Johnson was wrong; patriotism isn’t the last refuge of the scoundrel, it’s a constitutional amendment. The only purpose of such amendments is to allow members of Congress to shirk their responsibility to propose and support meaningful deficit reduction measures now. Unless they are cosponsors of Paul Ryan’s detailed deficit reduction proposal, or have put forward one equally as stringent and detailed, they can’t be considered serious about the budget and should simply be ignored when saying anything about the need for constitutional changes to make them do what they should already be doing.

Dodd's failed reform

3 March 2010 - 11:25am

        I was  on the road and essentially off-line all day yesterday, so forgive me for being late to comment on Senator Chris Dodd’s newest and most bizarre proposal for some kind of consumer financial protection agency.

     In his third bid in as many days to win over a few token Republicans, the Senate Banking chairman is now proposing to create an enfeebled new consumer regulator inside the Federal Reserve.

      Say what????  This is the same Chris Dodd who, four months ago, accused the Fed of being “an abysmal failure” as a regulator and unveiled a bill that would have stripped it of virtually all its supervisory powers.

     "Over the last number of years when [the Fed] took on consumer-protection responsibility and regulation of bank holding companies, it was an abysmal failure," Dodd declared  at a press conference in November 9.

     Dodd’s original bill was dead on arrival, in part because it went too far in its anti-Fed zeal and alarmed Democrats as well as Republicans on the banking committee. 

       But now Dodd the Fed-basher is proposing to make the Fed  an even more important consumer regulator than before.

      “It’s almost like a bad joke,’’ Rep. Barney Frank, chairman of the House Financial Services Committee, told Politico on Tuesday.

      Like both Frank's bill, which has passed the House, Dodd’s original bill would have created astand-alone Consumer Financial Protection Agency that would be have the power to  write rules and enforce them.  

       The central idea was not to expand regulatory power. It was to consolidate the  existing consumer-protection powers of bank regulators into a separate agency that would be more focused and less likely to be co-opted by the very banks they regulated.

     But Dodd has groveled so much for support from a few token Republicans that he has lurched from one incoherent proposal to another.   

     Last Friday, he proposed dropping the stand-alone agency  in favor of an emasculated  “Bureau of Financial Protection” inside the Treasury Department.   Consumer groups immediately protested, pointing out that the “bureau’’ would have limited enforcement power and could be blocked by the other bank regulators. 

      More surprisingly, Dodd’s Republican counterparts on the committee – Bob Corker of Tennessee and Richard Shelby of Alabama – immediately rejected the compromise as still far too restrictive. As Felix Salmon has remarked, it makes you wonder what Republicans would ever accept.

       On Monday, Dodd floated the idea of putting consumer protection inside the Federal Deposit Insurance Corporation.   Still no dice.   Finally, Dodd proposed putting it in the Fed – the same Fed that was rightly attacked for utterly failing to clamp down on no-doc loans and all the rest until it was too late.

    I am not a Fed-basher, per se.   Neither is Barney Frank, whose own bill would create a standalone consumer agency but would also increase the Fed’s power to rein in Too-Big-To-Fail institutions. It’s a good move: the Fed has unique expertise in that area.

     But even Fed officials admit that they  failed to crack down on liar’s loans and the other exotic mortgages that nearly destroyed the financial system. That’s why Ben Bernanke, the Fed chairman, has never really fought the proposed consumer agency. 

      Dodd’s rebuttal, of course, is that the organizational location of the consumer regulator isn’t as important as its authority. But his proposal is hardly reassuring on that front. At least in the Treasury version of his plan, the new regulator would have no enforcement or examination power for the 8,000 smaller banks and it would have to “consult’’ with the main regulator overseeing bank safety-and-soundness (i.e., bank profits) and  “consider the regulator’s concerns prior to taking any enforcement action.”

    As feckless as Dodd’s proposal is, Republican logic has been even more twisted.    Shelby, the ranking Republican on Senate Banking, has argued for months the Fed blew it as a regulator in the run-up to the crisis and should not be given more power.   

     “In the face of rising home prices and risky mortgage underwriting, the Fed failed to act,” Shelby charged during Ben Bernanke’s confirmation hearing for a second term as Fed chairman. . “Many of the Fed’s responses, in my view, greatly amplified the problem of moral hazard stemming from ‘too big to fail’ treatment of large financial institutions and activities.”

      Shelby certainly sounded as if he was angry because the Fed didn’t use its authority to crack down on bad mortgage practices.

        But because Shelby opposes regulation even more than he opposes the Fed, he fought the Consumer Financial Protection Agency and pretty much every other Democratic proposal for financial overhaul.

      It’s hard to know how much Shelby is driven by his own personal orneriness or general Republican obstructionism.   It doesn’t matter.  What matters is that the only people who do like the deal are in the financial industry. 

     Bottom line: Dodd is stooping too low to line up too few  allies for a reform that will be too tepid to do any good.  He should have the courage to walk away.

 

Choice + Testing << Market-Based

3 March 2010 - 9:07am

Yesterday, NPR ran a segment on Diane Ravitch and her new book, The Death and Life of the Great American School System: How Testing and Choice Are Undermining Education.  Once a proponent of school choice and testing, including the way they were supposed to be implemented in the No Child Left Behind Act, she now regards them as threats to our educational systems.  From the segment:

"She says one of her biggest concerns is the way the law requires school districts to use standardized testing."

"The basic strategy is measuring and punishing," Ravitch says of No Child Left Behind. "And it turns out as a result of putting so much emphasis on the test scores, there's a lot of cheating going on, there's a lot of gaming the system. Instead of raising standards it's actually lowered standards because many states have 'dumbed down' their tests or changed the scoring of their tests to say that more kids are passing than actually are."

I don't disagree with her yet.  High-stakes testing is a means to an end -- the ultimate end is evaluation and assessment of school performance.  But there are plenty of ways to evaluate and assess that don't include standardized testing, let alone the strange mix of non-standardized testing that we have observed with NCLB. 

But then she picks the wrong fight. <!--break--> Continuing from the segment:

"There should not be an education marketplace, there should not be competition," Ravitch says. "Schools operate fundamentally — or should operate — like families. The fundamental principle by which education proceeds is collaboration. Teachers are supposed to share what works; schools are supposed to get together and talk about what's [been successful] for them. They're not supposed to hide their trade secrets and have a survival of the fittest competition with the school down the block."

Competition and collaboration are not mutually exclusive.  Far from it -- almost everywhere you look in nature, the winners of "survival of the fittest competition" are the entities that found ways to collaborate and succeed.  (Cue Richard Dawkins.)  But what does not occur in nature or society, because it is not viable over any reasonable length of time, is a strategy of making a "family" out of disparate actors just by placing them near each other.  (Cue F. A. Hayek?)  Families involve tremendous amounts of sacrifice of the selfish interests of one member for those of another.  The willingness to do that systematically does not occur without strong bonds of kinship.

It is in fact a mistake to think that choice and accountability by themselves will be enough to improve performance, without the other elements of a competitive marketplace.  The most important of those elements is freedom of entry by any producer who thinks he can do a better job than the current producers.  Consider Ravitch's disappointment with NCLB to date, as quoted in Chapter 6 of her book:

But what was especially striking was that many parents and students did not want to leave their neighborhood school, even if the federal government offered them free transportation and the promise of a better school. The parents of English-language learners tended to prefer their neighborhood school, which was familiar to them, even if the federal government said it was failing. A school superintendent told Betts that choice was not popular in his county, because "most people want their local school to be successful, and because they don't find it convenient to get their children across town." Some excellent schools failed to meet AYP because only one subgroup — usually children with disabilities — did not make adequate progress. In such schools, the children in every other subgroup did make progress, were very happy with the school, did not consider it a failing school, and saw no reason to leave.

Schools have many characteristics.  So-called performance, as measured by standardized tests, is only one such characteristic.  What the paragraph reveals is that location is important as well.  And in most cases, the school district has not allowed an alternative provider to come into the market and match the existing school on all of its non-performance characteristics while improving performance.  There is, in most cases, still a local monopoly on enough of the characteristics that matter.  Unless you break that monopoly, until you do in fact allow direct competition with "the school down the block," you should not expect to be treated to service that is any better than what you typically get as a member of a captive audience.

There were a number of interesting reactions to the NPR story.  Here are a few.

A Dopey Budget Idea from Jeb Hensarling and Mike Pence

3 March 2010 - 1:33am

In today’s Wall Street Journal, Republican Reps. Jeb Hensarling of Texas and Mike Pence of Indiana put forward a dopey idea for reducing federal spending so that they can appear to be fiscally responsible while still supporting every tax cut that comes down the pike and opposing any and all tax increases. Their simplistic idea is to just enact a constitutional amendment that would limit federal spending to “one fifth of the economy.”

This is a terrible idea on so many levels that it is hard to know where to begin to dissect it, but here goes. 

1. The Constitution has never in our history been used to enshrine a particular economic policy and it would be unwise to start now.   2. It will take years and extraordinary effort to get two-thirds of both the House and Senate to enact such an amendment. Keep in mind that every crappy delaying tactic that Senate Republicans have used against health care reform would certainly be used by opponents of this amendment. And what is the likelihood that such an amendment would ever even reach the floor given the current partisan makeup of Congress? If by some miracle this amendment made it through Congress, it would also have to get three-fourths of the states to approve it. At a minimum, going the constitutional route cannot be taken seriously as an answer to a problem of immediate concern.   3. When the congressmen say “the economy” one assumes that they are talking about the gross domestic product, a term with no legal definition. But perhaps they are referring to the gross national product or gross domestic income or national income. These terms are each slightly different but have at times been used as measures of “the economy.”* In the third quarter of last year, GNP equaled $14,363.7 billion, GDP equaled $14,242.1 billion, GDI (which is supposed to be the same as GDP) was $13,988.9 billion, and national income was $12,259.7 billion. There’s more than a $2 trillion difference between the high figure and the low one, which means that spending might be $420 billion higher or lower depending on which one is used.   4. Assuming that they meant GDP, there is another problem, which is that this figure is frequently revised; in fact, it is continuously being revised. And the magnitude of these revisions can be large over time. For example, back in 1981 we thought GNP in 1980 was $2,627 billion; today we think it was $2,822 billion.   5. An even bigger problem is that both the administration and Congress must necessarily develop the budget based on forecasts of GDP, which can sometimes be tragically wrong. For example, the budget for fiscal year 2009, which ended last Sept. 30, was first put forward by President Bush in January 2008. At that time, OMB estimated GDP for 2009 would be $15,215 billion. It turned out to be $14,259 billion—almost $1 trillion lower than expected. CBO did a little better; its January 2008 estimate for GDP in 2009 was $14,997 billion. Assuming that Congress used CBO’s forecast, it would have appropriated almost $150 billion more than permitted under the Hensarling-Pence proposal simply because of forecast error.   6. It would be one thing to impose a constitutional limit on spending if Congress had to vote on all of it every year; that is, if the entire budget consisted of discretionary programs. In fact, discretionary spending, which includes national defense, constituted only 35 percent of federal outlays last year, down from 61 percent in 1970. Since two thirds of the budget now goes either to interest on the debt or entitlement programs, how can this be controlled on a yearly basis? If too many people turn 66 and claim Social Security benefits, is Congress going to say they can’t have them if it would push spending above 20 percent of GDP? Of course not; the idea is ridiculous.   7. Tax expenditures are a huge loophole through which spending can be driven. For example, instead of spending $1 billion to buy some new equipment for the Army, the government could give the contractor a transferable, refundable tax credit worth $1 billion. Even if the contractor had no tax liability, it could simply sell the credit to some business that had at least a $1 billion tax liability. There would be no increase in spending as conventionally measured and taxes would simply be $1 billion lower.   8. Loans and loan guarantees are another loophole. Or the government could mandate through regulatory or even tax policy that private businesses or state and local governments undertake certain activities that the federal government normally spends money on. (It’s worth noting that there is no limit on taxation in the proposal; only spending is constrained.) The burden of government is not reduced when such methods are used, it only changes its form and location.   9. And of course there are the standard exceptions that Hensarling and Pence endorse for a declaration of war or a two-thirds vote by Congress to override the 20 percent limit. Since Congress hasn’t formally declared war since World War II, presumably none of the wars since then, including those we are fighting today in Iraq and Afghanistan, would permit deviation of the 20 percent rule. I wonder what Dick Cheney thinks about that? One also wonders what would happen the following year if Congress overrode the 20 percent rule by a two-thirds vote. Would spending have to be cut by an equal amount or could Congress simply enact a permanent override with one vote?   10. The whole question of enforceability is always glossed over by these constitutional approaches to the budget. Although Hensarling and Pence claim that their proposal is a “spending cap with teeth,” there is in fact nothing whatsoever in it that would require compliance. Congress, they say, “would be given the authority to enforce and implement it.” But Congress already has that authority and plenty of tools under the Budget Act of 1974 to implement a spending cap if it chose to. I guess that the congressmen just assume that the force of public pressure will make Congress and the administration be honest and law-abiding. But polls say that people already want a balanced budget and smaller deficits. Why would it be any different if there was a constitutional amendment mandating a limit on spending? Isn’t there a tremendous danger that the inevitability of Congress and the administration either sidestepping or just ignoring it would undermine the Constitution itself? Wouldn’t the courts have to take account of the flouting of it as opening the door to looking the other way when other constitutional provisions are violated as well? Or, alternatively, the courts might take it upon themselves to find a way of enforcing a spending limitation by mandating higher taxes, as the federal courts have forced local governments to do on occasion. I believe that state courts have also mandated higher taxes at times as well. At that point we might as well just dispense with Congress altogether.   In conclusion, this is a laughably bad proposal that deserves not one second of serious consideration. I’m embarrassed that I wasted so much time on it writing this post. But unfortunately, in this day and age, it appears that there is no idea too simplistic or unworkable to make the rounds through the right wing blogosphere to talk radio and hence to Fox News, so I feel obliged to at least try and stamp it out before it gains traction.     * In Senate Report 99-162 (1985), the Senate Judiciary Committee explained a constitutional amendment that would have allowed spending to rise no faster than “national income.” It had this to say about what the term meant (p. 52): “The precise concept of national income is intended to remain subject to the discretion of the Congress. Currently reported concepts include gross national product, net national product, national income, and gross domestic product. Any of these may be chosen, as might some new measure determined by the Congress.” Addendum: Jon Chait puts in his two cents here. Daniel Gross comments here.