Monday, November 14, 2011

A bad idea whose time should never come.

The idea of a Balanced Budget Amendment (BBA) enjoys broad populist appeal and strong support from the field of Republican presidential candidates. Mitt Romney, Rick Perry, and Herman Cain all support it.
But the sentiment for a BBA is by no means unanimous, even among conservatives; many have concluded that it is a bad idea, for several good reasons.
Anyone who currently favors a BBA should take a few minutes to consider two things: (1) the four fatal flaws of a BBA, and (2) a superior alternative to the BBA.
Flaw #1: The BBA is based on a false conception of the "debt burden"

BBA falsely presumes that the proper balance is 0 percent debt and 100 percent equity financing.

The “debt” is not the same as the “debt burden.” Although a deficit increases the debt level, it doesn’t necessarily increase the debt burden. Any given level of debt can be either (a) easily affordable, or (b) financially unbearable. It all depends on the borrower’s ability to service the debt, not on the debt level per se.
For example, the bank loan for a private business jet would instantly crush a median wage-earner; however, it would amount to mere peanuts for George Soros. The debt level would be the same in both cases, but the debt burdens would be completely different.

By Christopher J. Conover

Healthcare will overtake shelter within five years to become the single largest category of consumption. How has this happened?

The federal budget is not the only place where health spending is crowding out other spending. The share of household consumption devoted to healthcare has more than quintupled over the past eight decades. In fact, healthcare now ranks second in importance in the share of personal consumption spending devoted to it. Healthcare will likely overtake shelter within five years to become the single largest category of consumption. How has this happened?
The extraordinary productivity of the American economy over the past 80 years has made the necessities of life far more affordable for the typical family. Before the Great Depression, Americans devoted two-thirds of household personal consumption spending solely to food, clothing, and shelter. By 2010, such necessities constituted only two-fifths of all household consumption. During the same period, healthcare’s share more than quintupled to 21.8 percent of all personal consumption.

By STEPHEN MOORE

Former House Speaker Newt Gingrich continues to surge in the polls. Last week a CBS poll had Herman Cain at 18%, with Mitt Romney and Mr. Gingrich tied at 15%. Even more impressive was the latest McClatchy-Marist poll, which had Mr. Romney at 23%, Mr. Gingrich at 19% and Mr. Cain at 17%. A little over a month ago, Mr. Gingrich was barely above 5% in any poll.
Is the former Georgia congressman simply the latest flavor of the month in the wake of the Herman Cain sexual-harassment allegations, or can he actually win? In an interview with me this weekend, he notes that "after every debate I keep rising in the polls." He sees at least 70% of voters looking for an alternative to Mitt Romney as the GOP nominee. Mr. Gingrich says conservative voters "know I am the one who would be best to debate President Obama."
One Gingrich strategy that seems to be paying off is to remind voters of his record as speaker. He says he was the one who was able to persuade then-President Clinton "to sign a balanced budget, welfare reform and tax cuts." He says he inherited a 10-year forecast of $2.7 trillion in deficits, but that when he left Congress the forecast was "more than $2 trillion in surpluses" and "voters would love to see that happen again."
Mr. Gingrich has clearly appeared presidential in the GOP debates, and he says focus groups almost always "pick me as the debate winner." Mr. Gingrich's campaign suffered some major setbacks earlier this year after he attacked the Paul Ryan's budget plan and his staffers began to resign. Now Mr. Gingrich is where Michele Bachmann was in late summer and where Rick Perry sat four weeks ago. Whether he has staying power is another matter, but for now Mr. Gingrich is positioning himself to be Mitt Romney's greatest rival. "I'm the anti-Washington-establishment candidate. That's why so few in Washington are for me."

The Things Newt Carries

Fit to Be Commander-in-Chief?

Private-Equity Firms See Bright Spot in Asia

GOP's Distracting Headlines Benefitting Gingrich

Shadow Labor. by Doug French

Everybody does "shadow work." No matter how a person makes a living — trading time, talent, and productivity for a more marketable commodity, money, so as to trade that indirect good for necessities and beyond. Virtually everyone in the modern economy pumps their own gas, drives themselves to work, or scans their own groceries.
In his New York Times piece "Our Unpaid, Extra Shadow Work" Craig Lambert says the term "shadow work" was coined 30 years ago by Austrian philosopher and social critic Ivan Illich, in his 1981 book of that title. Illich believed any work we do that we aren't directly compensated for is shadow work.
Mr. Lambert points out that in order to work for a living we all take on various unpaid tasks. Driving to a job means we have to not only operate the car but fuel it, obtain insurance, have it maintained periodically, and so on. Even if we don't change the oil, we accept the management role to see that it's done.
The digital world has generated hours of shadow work. Travel agents are going the way of the Dodo bird while we log in and book our own plane flights, rental cars, and hotel reservations. Once we get to the airport, we deal with self-serve kiosks until it's time to cross the TSA border where a human hand is provided but unwanted.

The good news is that Americans' distrust of government is at its highest level ever.
It's good news because it shows the public recognizes how poorly we're being governed. Not much good comes out of trusting people who shouldn't be trusted — not much good comes out of reelecting them, either.
Only 9 percent of Americans approve of the way Congress is handling its job, according to the latest New York Times/CBS News poll. That's one point higher than the percentage of Americans who said in a 2002 Fox News/Opinion Dynamics poll that they believe Elvis could still be alive.
Asked if they approve or disapprove of the way Barack Obama is handling job creation, 58 percent disapproved, 35 percent approved and 7 percent were undecided.

The Congressional Budget Office's just-published Trends in the Distribution of Household Income Between 1979 and 2007 found an increasing concentration of income over that period, ranging from 275 percent income growth for the top 1 percent of households and 65 percent growth for the rest of the top 20 percent down to 18 percent growth for the lowest 20 percent of household incomes.
Left-liberals instantly used the CBO report to repeat their "the rich are getting richer at everyone else's expense" mantra. Representative Sander Levin (D-MI) called it "just the latest evidence of the alarming rise in income inequality in America," and the Washington Post's Eugene Robinson called the result "a nation starkly divided between haves and have-nots."

By Leigh Jones

NEW YORK |

(Reuters) - Just days after the collapse of MF Global, a healthcare plaintiffs' lawyer registered the domain mfglobal-lawsuit.com -- a sign of the legal business the brokerage's failure is expected to generate.
Timothy Butler of Darien, Connecticut, said he is hoping for a slew of new clients in the wake of the October 31 bankruptcy of the futures brokerage that was run by former New Jersey Governor Jon Corzine, and he has good reason to be optimistic.
"There's going to be a tremendous amount of litigation spawned by this case," said Butler, a partner at Tibbetts, Keating & Butler, which has offices in New York and Connecticut. Since registering the domain name, he said, "my email box is full and my phone is ringing off the hook."

inShare

An opponent of health care reform holds a sign as he listens to Congressman David Scott (D-GA) during a town hall meeting in Jonesboro, Georgia, August 15, 2009. REUTERS/Tami Chappell

By James Vicini

WASHINGTON | Mon Nov 14, 2011 5:14pm EST

(Reuters) - The Supreme Court agreed on Monday to decide the fate of President Barack Obama's healthcare law, with an election-year ruling due by July on the U.S. healthcare system's biggest overhaul in nearly 50 years.
A Supreme Court spokeswoman said oral arguments would take place in March. There will be a total of 5-1/2 hours of argument. The court would be expected to rule during its current session, which lasts through June.

Obama to China: Behave like a "grown up"

(Reuters) - President Barack Obama served notice on Sunday that the United States was fed up with China's trade and currency practices as he turned up the heat on America's biggest economic rival.
"Enough's enough," Obama said bluntly at a closing news conference of the Asia-Pacific Economic Cooperation summit where he scored a significant breakthrough in his push to create a pan-Pacific free trade zone and promote green technologies.
Using some of his toughest language yet against China, Obama, a day after face-to-face talks with President Hu Jintao, demanded that China stop "gaming" the international system and create a level playing field for U.S. and other foreign businesses.

The Laffer Curve, Part II: Reviewing the Evidence

A Lesson on the Laffer Curve for Barack Obama

One of my frustrating missions in life is to educate policy makers on the Laffer Curve.

This means teaching folks on the left that tax policy affects incentives to earn and report taxable income. As such, I try to explain, this means it is wrong to assume a simplistic linear relationship between tax rates and tax revenue. If you double tax rates, for instance, you won't double tax revenue.
But it also means teaching folks on the right that it is wildly wrong to claim that "all tax cuts pay for themselves" or that "tax increases always mean less revenue." Those results occur in rare circumstances, but the real lesson of the Laffer Curve is that some types of tax policy changes will result in changes to taxable income, and those shifts in taxable income will partially offset the impact of changes in tax rates.

Joining the Chorus for Tax Cooperation. by Richard W. Rahn

How much pressure would it take before you would sell out your intellectual integrity? Those who are given responsibilities for developing and promoting sound public policy are subject to never-ending pressure by those in the political class to serve them rather than the public.

An extraordinarily well-researched and provocative paper has just been released, tracing how the Organization for Economic Cooperation and Development (OECD), a major international organization, descended from promoting trade- and job-creation policies among the nations of the world to one that is supporting job-destroying tax cartels for the benefit of the high-tax countries. The paper, "Cartelizing Taxes: Understanding the OECD's Campaign Against 'Harmful Tax Competition,'" was clearly and interestingly written by law and economics scholar Andrew Morriss of the University of Alabama and Swedish economic researcher Lotta Moberg of George Mason University. The authors conducted many interviews and used primary and secondary sources to support their disturbing conclusions.

Obamacare Is Unconstitutional

Roger Vinson
Roger Vinson is senior U.S. district judge for the Northern District of Florida. This article is excerpted from his decision in Florida v. Department of Health and Human Services, issued on January 31, 2011, and available in full online. Internal citations have been omitted.
On March 23, 2010, President Obama signed The Patient Protection and Affordable Care Act. This case was filed minutes after the President signed it. This case is not about whether the Act is wise or unwise legislation, or whether it will solve or exacerbate the myriad problems in our health care system. In fact, it is not really about our health care system at all. It is principally about our federalist system, and it raises very important issues regarding the Constitutional role of the federal government.
James Madison, the chief architect of our federalist system, observed in Federalist No. 51:

In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.

The Founders endeavored to resolve Madison's identified "great difficulty" by creating a system of dual sovereignty. The Tenth Amendment reaffirmed that relationship: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." The Framers believed that limiting federal power, and allowing the "residual" power to remain in the hands of the states (and of the people), would help "ensure protection of our fundamental liberties" and "reduce the risk of tyranny and abuse." The great Chief Justice John Marshall noted "that those limits may not be mistaken, or forgotten, the Constitution is written."

The Real "1 Percent". by Michael D. Tanner

So just who are those top 1 percent of Americans that we're all supposed to hate?

If you listen to President Obama, the protesters at Occupy Wall Street, and much of the media, it's obvious. They're either "trust-fund babies" who inherited their money, or greedy bankers and hedge-fund managers. Certainly, they haven't worked especially hard for their money. While the recession has thrown millions of Americans out of work, they've been getting even richer. Worse, they don't even pay their fair share in taxes: Millionaires and billionaires are paying a lower tax rate than their secretaries.
In reality, each of these stereotypes is wrong.

By and large, the wealthy have worked hard for their money.

Budget Blunders of 1990 Are No Blueprint for 2011. by Alan Reynolds

As the "supercommittee" on deficit reduction tries to hammer out an agreement to trim the growth of future spending by $1.2 trillion (a mere $120 billion a year), the first proposal from the Democrats was to start by raising taxes $1.3 trillion.

Recent reports suggest they might settle for trading $1 trillion in new taxes in exchange for $1 trillion in seemingly nebulous spending cuts in the distant future.
The role model for that sort of "balanced" deal was the Omnibus Budget Reconciliation Act of 1990 (OBRA-90). By signing that pact Nov. 5, 1990, President George H.W. Bush famously abandoned his "read my lips" pledge of no new taxes and agreed to what President Obama now calls a "balanced approach," phasing out deductions and exemptions for higher incomes and raising the top tax rate.
President Bush also greatly increased federal excise taxes on gasoline, tobacco, alcohol, telephones, air travel and "luxuries" like yachts and private jets.

Repeating the 1990 tax policy blunders would not help reduce spending, and it certainly would not help raise GDP, so it would not help.

This July, New York Times columnist Thomas Friedman praised the elder Bush for "balanced conservatism," because he "agreed to a compromise with Democrats to raise several taxes." A few days earlier Washington Post writer Steven Mufson had written: "It may be time to reconsider the history of the 1990 budget deal," because "as long as any increase in taxes is equated to political suicide, managing America's finances will prove difficult."

How to Break the Super Committee’s Tax-Increase Roadblock: View

Call us unduly optimistic, but we keep seeing signs that the congressional supercommittee just might be able to come up with a budget-cutting deal before its Nov. 23 deadline.
Democrats have indicated a (still insufficient) commitment to entitlement reform. Republicans have made (still insufficient) progress in allowing more revenue.
But one of the chief obstacles remaining is a semantic one: Congressional Republicans still furiously object to anything that might be considered “new taxes.” To help, here are a few ideas we’ve been arguing for that will raise revenue and restrain entitlements -- and that can plausibly be called something other than new taxes. We estimate these ideas could save roughly $1.76 trillion over 10 years.
First, phase out the mortgage-interest deduction. It costs about $100 billion a year and disproportionately benefits the well-to-do. Worse, it can goad people into buying homes they can’t afford. Start by limiting the deduction to only principal residences and reducing the maximum amount of eligible mortgage debt to $500,000. Full deductibility can then gradually yield to ever-smaller partial deductions. We estimate the savings over 10 years could be about $200 billion.
If that reform seems too audacious given the state of the housing market, then consider this: Phase out deductions and credits for taxpayers earning more than $500,000 a year -- in exchange for a lower tax rate. Such a move could yield roughly the same savings over 10 years.

Amazon E-Library Is Publishing’s Profit Model: Virginia Postrel

Amazon.com Inc. is at it again. To the consternation of much of the book industry, the online giant is again offering digital titles for less than major publishers think books are worth. And this time, the price is zero.
If you own an Amazon Kindle, as opposed to just using the Kindle app on another device, and you also belong to the company’s $79-a-year Amazon Prime service, you can now “borrow” one digital book a month from the new Amazon Lending Library for free. You can keep the book as long as you want, but you can have only one at a time.
The new service worries Wall Street, too, because it increases Amazon’s out-of-pocket costs. The company is paying wholesale prices for some of the books in the lending library. For others, such as the titles from Lonely Planet travel guides, it is paying a flat fee for a group of books over a period of time. (It will report sales figures on individual titles back to those publishers.)

Obama: ‘Enough’s Enough’ on China’s Currency

President Barack Obama kept up his pressure on China's foreign-exhange policy and trade practices, saying “enough’s enough” on what the U.S. views as a too-slow appreciation of the yuan.
While there's been a “slight improvement,” China’s exporters “like the system the way it is” and are resistant to any moves to loosen the reins on the yuan, Obama said.
“Changes are difficult for them politically, I get it,” Obama said at a news conference concluding a summit with Asia- Pacific leaders in Hawaii yesterday. “But the United States and other countries, I think understandably, feel that enough’s enough.”

Stocks Decline as Europe Contagion Fears Remain High

Stocks and the euro declined as Italy’s borrowing costs increased to a euro-era record at an auction today, deepening concern Europe will struggle to contain its debt crisis. German bunds rose, while copper climbed as Japan’s economy grew for the first time in a year.
The Standard & Poor’s 500 Index lost 0.9 percent to 1,252.02 at 1:31 p.m. in New York after rallying 2.8 percent in the previous two sessions. The Stoxx Europe 600 Index dropped 1 percent as UniCredit SpA slid on plans to sell shares. The euro weakened 0.9 percent to $1.3628. The yield on the Italian five- year bond rose 17 basis points and Spanish 10-year rates surged to a euro-era record above German yields.

Economics focus

Protests in the West have roots beyond bouts of austerity

AFTER two decades of stable growth and mostly quiet streets the rich world has become an unruly place. Hundreds of protesters have been camped in New York’s financial district since September, inspiring similar movements in large cities around the world. In Rome the protests turned violent as demonstrators set cars alight and hurled rocks at police. Greek workers demonstrated again this week against yet another set of austerity measures. Public anger is clearly fuelled by economic troubles, but the link between economic conditions and unrest is complex.

China’s economy

A squeeze on lending hits China’s entrepreneurial heartland

WENZHOU |

TAXI drivers, to the puzzlement of economists, often work long hours on slow days and clock off early in busy periods. In Wenzhou, a city in China’s Zhejiang province famous for its entrepreneurs, drivers are cannier. At busy times, they keep their “For hire” lights on even after picking up a passenger, hoping to find another fare going in the same direction. That way, they double their money—although only one fare registers on the meter.

With lots of bustle and a little hustle, Wenzhou businessmen have contributed enormously to China’s economic progress. That success continued in the third quarter, when China’s output grew by 9.1% compared with a year earlier (see chart 1). But the threats to growth are mounting, and Wenzhou symbolises one of the dangers.

Economic crisis

This week’s summit was supposed to put an end to the euro crisis. It hasn’t

YOU can understand the self-congratulation. In the early hours of October 27th, after marathon talks, the leaders of the euro zone agreed on a “comprehensive package” to dispel the crisis that has been plaguing the euro zone for almost two years. They boosted a fund designed to shore up the euro zone’s troubled sovereign borrowers, drafted a plan to restore Europe’s banks, radically cut Greece’s burden of debt, and set out some ways to put the governance of the euro on a proper footing. After a summer overshadowed by the threat of financial collapse, they had shown the markets who was boss.
Yet in the light of day, the holes in the rescue plan are plain to see. The scheme is confused and unconvincing. Confused, because its financial engineering is too clever by half and vulnerable to unintended consequences. Unconvincing, because too many details are missing and the scheme at its core is not up to the job of safeguarding the euro.

Financial markets

The prime minister’s botched referendum plan has left the debt deal in trouble

“JUST when I thought I was out, they pull me back in.” Investors must be tempted to echo the words of Al Pacino in “The Godfather: Part III”. Markets rally every time euro-zone leaders announce a plan to solve their debt crisis, as they did again on October 27th. But within a few days, it becomes apparent that each package has not solved the underlying problems, and investors are pulled back into the mayhem.
On October 31st the unheralded announcement by George Papandreou, the Greek prime minister, that he would call a referendum on the debt deal turned market sentiment drastically. It prompted intense pressure from Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, that any such referendum be held as soon as possible and become a vote on staying in the euro. By November 3rd, as The Economist went to press, the prospect of a vote that could pave the way for an exit from the euro, and a disorderly default, had pushed the Greek government to the brink of collapse.

The euro crisis and emerging markets

With the debt crisis worsening, trouble is in store for the neighbours

AS THE rich world lurches from one crisis to the next, a consolation has been that emerging economies, which account for about half of world output, have been growing quickly. Even the wretched euro zone has a few racy emerging markets nearby. Turkey has on occasion rivalled China, with GDP growth of around 9% in 2010. Poland’s was the only economy in the 27-strong European Union to avoid recession in 2009. Sadly, euro misery seems to love company. A deep recession in the currency zone would leave few countries unscathed, even in fast-growing emerging Asia. For developing economies closer to home, the euro zone’s banks may be the main route by which the suffering spreads.
These banks are under pressure to meet higher capital-ratio targets as part of a deal made last month to “save” the euro. Lenders may choose to cut loans rather than raise equity, which would dilute existing shareholders (including bank executives). Europe’s banks are owed $3.4 trillion by emerging economies, $1.3 trillion of which has been lent to eastern Europe, according to the Bank for International Settlements. Many have subsidiaries in the region. If banks choose to sacrifice foreign lending to concentrate on business at home, it could choke the supply of credit.

The euro crisis might wake Europe up. But more likely, argues Edward Carr, it will lead to compromise and decline

WHEN BRITAIN ABANDONED the gold standard in 1931, it was not only forsaking a system for managing the currency but also acknowledging that it could no longer bear the mantle of empire. When America broke the dollar’s peg with gold in 1971, it ushered in a decline that continued until Paul Volcker re-established confidence in the currency in the early 1980s. As Joseph Schumpeter, the great Austrian economist, once wrote: “The monetary system of a people reflects everything that the nation wants, does, suffers, is.”
In the same way, the crisis that has engulfed the European Union (EU) is about much more than the euro. As government bonds, share prices and banks swoon and global recession knocks on the door, the first fear is of financial and economic collapse. But to understand what is happening to the currency you also need to look at what is happening to Europe.

America’s deficit

America’s politicians look like missing a golden opportunity to restore the country’s finances

CONGRESS guards its privileges jealously, so when it agrees to delegate much of its power, even temporarily, the moment should not be squandered. That is why so much depends on its Joint Select Committee, a group of six Democrats and six Republicans drawn equally from the House of Representatives and the Senate, which has been charged with hacking away at America’s swollen deficit.

The elusive progressive majority

IN BOXING they call it the tale of the tape. Before battle is joined, fight fans and managers compare the height, weight, reach and record of the contestants. This, roughly, is the equivalent moment in American politics. One year out from a presidential election is the point at which big strategic decisions about the shape of the forthcoming fight are being made. It is also the time when a bad strategic decision can turn out to be fatal.
Is the campaign to re-elect Barack Obama about to make a mistake of this kind? One person who thinks it might be is Bill Galston, a former member of Bill Clinton’s White House. He has just explained why in a paper for the Brookings Institution, of which he is now a senior fellow. But to understand his worries you need first to look back more than a year at a different argument set forth by another political analyst, Ruy Teixeira, not long before the Republicans captured the House of Representatives in November 2010. In the long run, Mr Teixeira argued then, and unless the Republicans changed their ways, the great tectonic plates of American society were moving against them.