Alan Schram from the Huffington Post has written an interesting article explaining how the debt ceiling worries are overblown. Here’s a segment of the article:

But the disaster scenario — default on US debt — is still unlikely. First, because a compromise that involves deficit reduction along with a debt ceiling increase is still the most likely outcome, as it is the most sensible, even for our politicians with their polarizing agendas.

And second, because the US government collects much more in taxes than the amount necessary to service the debt. So even in the unlikely event that the debt limit is not increased, the coupons on US treasuries will still be paid and Treasury will prioritize other government expenditures, even if it has to shut down non essential government services.

More importantly, the debt levels are not the main concern. The real threat to the country’s long term financial health is the ongoing deficit. US revenues were about $2.2 trillion last year. Expenditures were $3.5 trillion. Interest payments were only about 6% of that. Entitlements — Medicare, Social Security and unemployment insurance — accounted for roughly 58% of total expenditures. And defense was another 20% (it seems strange that any country would dare to have 150 military bases around the world and be involved in three wars while running a deficit of over $1 trillion a year, but, that is a whole other topic).

Such perennial deficits are obviously untenable. It is the one issue we simply must deal with, and it is certainly not impossible. If we limit government spending to the level it was in 2007, not exactly the age of austerity, we will have a balanced budget within three years. If we than keep it at that level for ten years, we will also substantially reduce our debt levels. This will return the country to very solid financial footing.

Hopefully this will be the last time I feel compelled to write about the debt ceiling for a while. There are other subjects I want to tackle, but this issue remains front and center in the news. Just a few thoughts.

Default and Economic Armageddon
The administration has repeatedly talked about how if we don’t raise the debt ceiling, it will cause the U.S. to default on its obligations and cause economic Armageddon that could push us into another recession. They use these two points interchangeably, often mixing them within the same quote. But they’re not the same point at all.

Credit rating services have warned that if we go into default, they will lower our credit score. They have also warned that if we do not come up with a long-term plan to tackle our deficits and debt that we risk hurting our credit rating.

The deceitful portion of this entire conversation by our politicians and media pundits is the assertion that we’ll go into default at all.

The federal government is expected to collect more than $170 billion in revenues in August. That’s more than enough money to service our debt (avoiding default), make social security payments, Medicare payments, Medicaid payments, pay the military, and more. Other government agencies would have to be temporarily shut down until money became available. But there’s absolutely no chance that we would actually go into default in the foreseeable future. And there’s no chance that we wouldn’t be able to make social security payments to our seniors. At least in the short-term.

Now the administration’s second point about economic Armageddon is a much trickier issue to predict. And I’m not sure who to believe on this one. From President Obama to Paul Ryan, politicians from both sides have warned about the dire consequences of not raising the debt ceiling. Though this could easily be “cover your ass” mode for our politicians. It’s better politically to predict doom and be wrong, than to predict that everything will be fine and we end up with economic Armageddon.

I tend to have more faith in the market than this. Business leaders understand what’s at stake here — the long-term financial health of our government and our economy. I suspect that there’s a good chance that the markets will give Congress time to resolve this issue beyond August 2nd before it reacts. But the market can spook, and it’s a legitimate risk.

I’m not advocating anything in particular with these comments. I’d like to see a reasonable deal get done by August 2nd. More on that in a moment.

Compromise
Sometimes it’s all in your point of view. What is compromise? The Democrats tell us that compromise is raising taxes by $1 trillion, and offering spending cuts that may or may not result in around $3 trillion is savings over the next ten years. The Republicans, many who do not want to raise the debt ceiling at all, tell us that compromise is requiring trillions in real cuts to federal spending and entitlement reform in exchange for raising the debt ceiling.

The Democrats have refused to proceed without tax increases. The Republicans have refused to proceed with tax increases. Everything else is spin.

Do you remember the last negotiation over the budget? The two sides agreed upon $30 billion in spending cuts. But when the actual cuts were scored, it was really only about $300 million in savings. So excuse me for being skeptical over the Democrats’ spending cuts. Word has it that the Democrats have only targeted around $1.5 trillion in cuts to accompany their $1 trillion in tax increases. There is no “grand plan” for a $4 trillion deal. It will never happen.

The Polls
I watch the polls because I find them interesting. But they should always be taken with a grain of salt. And I would never advocate that we should govern through polls.

Last week, President Obama cited a poll and said that “80% want higher taxes” as part of a deal to slash the deficit. His point is that reasonable people understand that we need to increase tax revenues as part of the negotiation, and that the Republicans are not reasonable. “The American people are sold,” he said. “The problem is members of Congress are dug in ideologically.”

But to me, this is a misrepresentation of the Gallup poll he uses to reach this conclusion. According to Gallup, 50% of those polled said that we should fight the deficit with spending cuts only (20%) or mostly with spending cuts (30%). The poll also shows that 11% favor tackling the deficit with only tax increases (4%) or mostly tax increases (7%). That leaves 32% who said that we should fight the deficit equally with cuts and increased taxes.

Since 20% said “spending cuts only”, the President has concluded that 80% “want” tax increases, and agree with him on how to fight the deficit.

In my opinion, the “plan” proposed by the administration does not reach the level of “mostly spending cuts”. Matter of fact, has anyone actually seen a plan from the administration or from Democrats? I didn’t think so. All of this is a far cry from “80% want higher taxes”.

I will also tell you that Gallup often tracks more favorably towards liberal issues than many other polling services. In a recent poll from Rasmussen, their results show that “Just 34% think a tax hike should be included in any legislation to raise the debt ceiling. A new Rasmussen Reports national telephone survey finds that 55% disagree and say it should not.”

The Politics
Let me be clear, President Obama has no interest in reducing the size of government. Our current spending levels are where they are because that’s where the Democrats set them. The only reason that the President is discussing a “big” deal is because he needs to push this conversation out beyond the 2012 election. He needs to increase the debt limit by at least $2.4 trillion to guarantee that this conversation doesn’t come up during the election.

When you’re in the middle of a negotiation, you always ask for more than you want. That’s how it works. Does the President really want a $4 trillion deal? If so, he should have asked for $6 trillion. He asked for $4 trillion because what he really wants is at least a $2.4 trillion increase in the debt limit. The number is arbitrary so long as we don’t have to have this discussion again for the next 18 months.

What Needs To Be Done
It’s still my opinion that this negotiation should only include spending cuts (as I stated here). We need real tax reform, not just closing a few loopholes to generate more tax revenues. And we certainly cannot negotiate real tax reform in the next week.

If I was in Congress (it would likely have to start in the House but it would be better from the Senate), I would propose a $1 trillion deal for real spending cuts and an equal increase in the debt limit. Certainly moderates and conservatives can find $1 trillion in cuts to agree upon over the next five years. This deal wouldn’t push us out beyond the next election, but it buys us more time to continue the conversation. The President has said he will not sign a shorter term deal, but is he really ready to accept the responsibility for not raising the debt ceiling? I doubt it.

When the President scolded Congress for kicking the can down the road on our deficits and debt reduction, I just about keeled over with laughter. Portraying himself as the adult among unruly children is so disingenuous that it’s laughable. Charles Krauthammer has penned an excellent article worth the read in IBD. Here are a couple excerpts:

First, a list of how Obama has been kicking the can down the road:

This from the man who:

• Ignored the debt problem for two years by kicking the can to a commission.

• Promptly ignored the commission’s December 2010 report.

• Delivered a State of the Union address in January that failed to even mention the word “debt” until 35 minutes in.

• Delivered in February a budget so embarrassing — it actually increased the deficit — that the Democratic-controlled Senate rejected it 97-0.

• Took a budget mulligan with his April 13 debt-plan speech. Asked in Congress how this new “budget framework” would affect the actual federal budget, Congressional Budget Office Director Doug Elmendorf replied with a devastating, “We don’t estimate speeches.” You can’t assign numbers to air.

And Krauthammer’s comments about the President’s attacks on jet owners and the oil companies:

And what have been Obama’s own debt-reduction ideas? In last week’s news conference, he railed against the tax break for corporate jet owners — six times.

I did the math. If you collect that tax for the next 5,000 years — that is not a typo — it would equal the new debt Obama racked up last year alone. To put it another way, if we had levied this tax at the time of John the Baptist and collected it every year since — first in shekels, then in dollars — we would have 500 years to go before we could offset half of the debt added by Obama last year alone.

Obama’s other favorite debt-reduction refrain is canceling an oil-company tax break. Well, if you collect that oil tax and the corporate jet tax for the next 50 years — you will not yet have offset Obama’s deficit spending for February 2011.

The hypocrisy on vilifying the jet class is hysterical. Included in the Democrat’s stimulus package was an incentive for corporations to purchase private jets. The incentive allows corporations to depreciate the purchase of these planes over five years instead of the standard seven. Why did they do this? Because they believed that this would stimulate the industry. It has been estimated that this “tax break” amounts to $300 million per year. That’s $3 billion over ten years when we’re running an annual deficit of about $1.5 trillion. But now this becomes the symbol of corporate greed and favors to big business. A symbol that the rich are not paying their fair share.

How many Republicans voted for the Obama stimulus that included this tax incentive? Zero.

This is all political theater. The Democrats do not want to lower spending. How do we know this? Easy. Show me a budget where they have developed a plan for tackling our deficits and the debt. You can’t, because they don’t have one. Remember, before the President said we must tackle our debt, he wanted a “clean” bill to raise the debt ceiling with “no strings attached”. Yet now he’s the adult in the room. The great compromiser. Don’t make me laugh.

If you know me by now, you know that I’m an advocate for tax reform. We need to overhaul our tax code. Not just overhaul it, we need to dump it in the trash and start over. And I have ideas for how to start.

However, that can wait till tomorrow.

Today, the Republicans and the Democrats are stalled as they attempt to work towards some type of compromise on raising the debt ceiling. This is the problem we need to solve today.

Raising the Debt Ceiling
Some people have expressed concern by what will happen if Congress fails to raise the debt ceiling in a timely manner. Democrats like to cite examples of organizations who have said that it will hurt America’s credit rating if we default on our debt and fail to raise the debt ceiling. And they are correct. Though it’s selective representation of the facts when they ignore that these same organizations have also warned that it will hurt America’s credit rating if we fail to implement an intelligent strategy for dealing with our deficits and our national debt.

But let me be clear (I love that phrase), we will not default on our debt. And we will raise the debt ceiling, despite all of the political posturing by both parties. And like most negotiations, it won’t happen until late in the game.

The Polls
What’s impressive to me is that the American people get it, even when politicians don’t. According to Gallup:

By a 47% to 19% margin, Americans say they would want their member of Congress to vote against raising the U.S. debt ceiling, while 34% don’t know enough to say. Republicans oppose raising the debt ceiling by 70% to 8% and independents by 46% to 15%. Democrats favor raising the ceiling by 33% to 26%.

This poll is a couple months old. More recent polls have shown some shift as voters become more aware of the negative ramifications of not raising the debt ceiling. But what is consistent through virtually every poll is that Americans only want the debt ceiling raised if it is accompanied by significant spending cuts. The American people get it.

What Economists Want
The President likes to talk about a “balanced approach” to these negotiations. What this means is that the President wants increased tax revenues as part of the deal to raise the debt ceiling. The President likes to say that this is what fair minded people believe needs to happen. Yet what do economists say? Did you know that 150 economists got together and sent a letter to the President urging him to rein in spending and to avoid tax hikes? Here’s the letter:

The national unemployment rate in our country remains unacceptably high, well above the levels promised to the American people when the 2009 ‘stimulus’ spending bill was signed into law.  Efforts to spark private-sector job creation through government ‘stimulus’ spending have been unsuccessful.

As economists deeply concerned about our nation’s future, we urge a change in direction.  To support real economic growth and support the creation of private-sector jobs, immediate action is needed to rein in federal spending.  The need for such action is particularly acute in light of your request for Congress to pass legislation in the coming weeks to increase the national debt limit, and the increased burden small businesses face as a result of the new health care law and other regulatory challenges that create uncertainty for private-sector job-creators.

Action is needed now to begin to slow government spending, reduce uncertainty and support the creation of new private-sector jobs.  For the sake of millions of Americans who remain out of work – and future generations of Americans, who will carry the debt burden we are accumulating today – we respectfully urge that the leaders of both parties take action immediately to eliminate unnecessary federal spending, prevent tax hikes, stop regulatory threats to job creation, and enact reforms to put our nation back on a true path to prosperity.

Non-Keynesian economists get it. (I added the bold copy to emphasize my points.)

Why Wait on Tax Reform?
The big picture is that we need significant tax reform, and this cannot be negotiated in the next couple of weeks. Obama’s own debt commission has explained the need to overhaul our tax system. While I don’t believe their recommendations go far enough, they’re on the right track with many of their suggestions. And trying to tweak a bad system by closing a couple tax loop holes or adjusting tax rates does nothing to solve the long-term problems with the tax code. This debt ceiling negotiation needs to focus on spending cuts, not tax increases. The American people get it. And non-Keynesian economists get it.

It’s a Spending Problem
If you follow politics, you’ve likely heard this mantra from the right. We have a spending problem, not a revenue problem. I have detailed in past articles some facts that support this position. What’s important to remember is that over the last 60 years we have had periods with much higher tax rates than we have today, and periods where we’ve had lower tax rates than we have today. And historically, we still collect LESS than 20% of GDP in taxes. It’s the economy that drives tax revenues, not tax rates. So to me, there’s a significant amount of logic in holding government expenditures to less than 20% of GDP. Yet according to the CBO, by 2021 we will be spending 25.9% of GDP, and by 2035, we’ll be spending 33.9% of GDP. That’s a spending problem.

James Pethokoukis from Reuters has written a powerful article detailing why we should not raise taxes:

It’s up to House Speaker John Boehner now. Democrats, the media and Wall Street will be pounding him to agree to raise taxes as part of a debt ceiling deal. But now is no time for Republicans to go wobbly. Here’s why the GOP should stick to its guns until Aug. 2 – and beyond if necessary:

1. The last thing the economy needs is a tax hike.
If the economy was too weak to absorb a tax hike last December – when the White House and Congress agreed to extend all the Bush tax cuts for two more years – its health is even worse today. The economy grew at just a 1.9 percent pace in the first quarter, and many economists now think it might grow just 2.0 percent in the second quarter – or even less. This should be a red flag to Washington. New research from the Federal Reserve finds that that since 1947, when two-quarter annualized real GDP growth falls below 2 percent, recession follows within a year 48 percent of the time. (And when year-over-year real GDP growth falls below 2 percent, recession follows within a year 70 percent of the time.)

In other words, the economic recovery is sputtering with stall speed fast approaching. Now would be a terrible time to penalize investors and business, both big and small, with new taxes.

2. Tax revenue isn’t the problem. Spending is.
The recent Congressional Budget Office budget outlook was illustrative. The CBO forecast to note is its “alternative fiscal scenario” which “incorporates several changes to current law that are widely expected to occur or that would modify some provisions that might be difficult to sustain for a long period.”

By 2021, the the CBO says, the annual budget deficit would be 7.5 percent of GDP and by 2035 a truly monstrous 15.5 percent. Throughout this period, tax revenue would be 18.4 percent, right around the historical average. But spending would be 25.9 percent in 2021, 33.9 percent in 2035 vs. an average of roughly 21 percent. It’s spending that’s way out of whack, not revenue.

But let’s say all the Bush tax cuts were left to expire, as was AMT relief. Assuming no economic fallout, according to the CBO, revenue would be 23.2 percent of GDP by 2035. Three problems here: a) even with all those tax increases, the annual budget deficit would still be nearly an unsustainable 10.7 percent of GDP in 2035; b) the U.S. tax code has never generated that level of revenue and almost certainly can’t without a value-added tax; and c) there would be tremendous economic fallout. Axing all the Bush tax cuts would chop three percentage points off GDP growth, according to Goldman Sachs, certainly sending America back into recession. Tax revenue would again plummet.

And as bad as those numbers are, they don’t fully take into account the economic impact of all that debt. When the CBO does makes those calculations, total debt as a share of output is not 187 percent of GDP – the number you frequently see in media accounts – but rather 250 percent of GDP since economic growth would slow sharply due to debt overload. And more than likely the economy would suffer a debt crisis long before 2035 came around.

3. The key to boosting tax revenue is faster economic growth.
A team of economists from the American Enterprise Institute recently fashioned a debt-reduction plan that would raise tax revenue to a long-term level of 19.9 percent of GDP. That’s pretty high when you consider there have only been three years in U.S. history that have seen a higher tax burden. Its tax plan:

“To achieve this goal, the income tax system would be replaced by a progressive consumption tax, in the form of a Bradford X tax. To address environmental externalities in a more cost-effective and market-based manner, energy subsidies, tax credits, and regulations would be replaced by a carbon tax.”

But the AEI team also notes that such a tax plan would more than likely boost growth:

“Economic simulations have repeatedly indicated that replacing the income tax system with a consumption tax can boost economic growth, although the magnitude of the gains depends on the assumptions that are made and on the detailed provisions of the consumption tax. One widely cited study estimates a 6.4 percent gain in long-run output from the adoption of an X tax.

“Our plan also reduces transfer payments to the elderly, which should further increase private saving and long-run growth. These growth effects have not been taken into account in the estimation of our plan. Accounting for them suggests that actual revenue requirements are lower than those stated above. For example, if our plan increases long-run output by even 5 percent and if government spending does not increase in response to the expansion of output, then the actual long-run revenue requirement will be 19.0, rather than 19.9, percent of GDP.”

Revenue of 19.0 percent of GDP happens to be the same revenue requirement of Rep. Paul Ryan’s Path to Prosperity debt-reduction plan. And tax reform isn’t the only thing that can boost economic growth. Increasing high-skill immigration, implementing regulatory reform, and raising productivity in education, government and healthcare could pump up economy-wide GDP growth by at least a full percentage point, according to McKinsey Global Insitute.

Bottom line: Higher taxes would hurt the economy, wouldn’t solve the debt problem and aren’t really needed anyway.

Double Dip is Looming
We are on the verge of a double dip recession. If we have a second consecutive quarter of economic growth of less than 2%, which appears very possible, history tells us that it’s nearly a 50% chance that we’ll experience a recession within the next year. We must get our spending under control, we must rein in government, and we must create a pro-business environment, or we’re all in trouble.

I was visiting with a relative a few years ago. He was a self-described liberal at the time. I asked him what he believed the primary function of government should be. His response: “The redistribution of wealth.”

Do you know a single liberal who would not advocate for increasing taxes on the rich?

I am a fiscal conservative and a social liberal. A man without a party. I have many friends who consider themselves to be liberals, meaning that they’re fiscally liberal as well as socially liberal, though most of them would probably not make a differentiation between the two. Some of them are environmentalists. Some advocate for women’s rights. Others focus on gay rights, or education, or poverty, or minority rights, or health care. These are all issues I have a great deal of compassion for. But the tie that binds liberals is the belief that we should raise taxes on the rich in order to expand government programs to fix social issues. Redistribution of wealth.

So how does this relate to Keynesian Economics?

I wrote two articles about Keynesian Economics back in March (Keynesian Economics Insufficient and The Stimulus and the CBO). I won’t rehash what we’ve already covered, but there is a core belief among Keynesians that is relevant to this discussion. Keynesians believe that for every dollar that is spent by the government, GDP will increase by more than a dollar. They call it a multiplier effect. Keynesian Economists have developed a series of formulas and multipliers they use to predict the growth of GDP from government expenditures. The government can “spend” money in many different ways, and these economists assign different multiplier values to each of these. And these economists believe that as GDP increases, jobs are created. They have a formula for that, too. So using these multipliers and formulas, they can predict the number of jobs that will be created as the government spends more money. (This is how the CBO has concluded that the Obama stimulus created jobs despite all evidence to the contrary.)

Redistribution of wealth is a political agenda. Keynesian Economics is a view of economics that states that when the government spends money, GDP rises, and jobs are created. It is my belief that many on the left gravitate to Keynesian Economics for just this reason. When you can justify endless government expenditures under the belief that we can solve our social issues while improving the economy, then what possible reason could there be to limit the growth of government? All we have to do is continue to raise taxes on the rich, increase funding to government programs, and we solve our problems. If you read Paul Krugman, the economist and writer for the New York Times, this is certainly what he has advocated for years.

Well, the problem is that Keynesian Economics has been found lacking. The expansion in the federal government did not create jobs, and did not fix the economy.

The Obama Stimulus
So does that mean that the Obama stimulus plan failed? If your measurement is what we were told by its supporters before the bill was passed, then yes, the stimulus failed. The economy has continued to struggle, and unemployment has far surpassed the administration’s original predictions.

But it would be a huge oversimplification to blame the stimulus for the current condition of the economy. In many ways, it would be just as dishonest as the Keynesians who continue to say that the stimulus created millions of jobs and kept us from a depression. The stimulus does not live in a vacuum. And to pretend that it does is illogical at best, and dishonest by those who should know better.

There is a larger narrative here. The stimulus bill was flawed, but certainly contained some tax cuts and business incentives that many would agree are good for the economy. And there’s a case to be made that under certain conditions, some government expenditures do benefit the economy. But the larger issue is that for everything that was done right, and there were a few, there were many more that were done wrong that have stifled economic growth. Unprecedented federal deficits and a huge expansion of the federal debt. The looming threat of increasing tax rates. An incoherent energy policy. The implementation of ObamaCare. New federal regulations, many from the EPA and the  banking reforms, that will cost businesses billions of dollars to implement. The projected growth and insolvency of entitlement programs including social security, Medicare and Medicaid. Unfunded liabilities to government employee pension plans. The list goes on and on. The administration has earned its reputation of being unfriendly to the business community. And the business community has responded by running for cover.

So did the stimulus fail? What if the stimulus had been accompanied by reductions in needless regulations, permanent reductions in tax rates and real tax reform, a free market approach to health care reform, entitlement reform, a legitimate plan to tackle our debts and deficits, and fiscal discipline from Congress? Do you believe that our economy would be better off today? Worse? The answer to that question is what separates fiscal conservatives from fiscal liberals.

A Final Note
Dishonesty is a primary reason that I don’t like most politicians and members of the media. I continue to hear from the administration how the stimulus kept us from a depression, despite a complete lack of evidence to support their conclusion. Nobody was predicting a depression before the stimulus bill was passed. And it’s revisionist history now to say that we would have gone into a depression without the bill. Here’s an article from IBD that explains how the data shows that the recession had already leveled off BEFORE the stimulus bill went into effect. Here’s a short piece from the article:

The conclusion is that in claiming to have staved off a Depression, the White House and its supporters seem to be engaging in a bit of historical revisionism.

Economists weren’t predicting a Depression.

White House economists forecast in January 2009 that, even without a stimulus, unemployment would top out at just 8.8% — well below the 10.8% peak during the 1981-82 recession, and nowhere near Depression-era unemployment levels.

The same month, the Congressional Budget Office predicted that, absent any stimulus, the recession would end in “the second half of 2009.” The recession officially ended in June 2009, suggesting that the stimulus did not have anything to do with it.

Lots going on around the country. Just a few thoughts for a Friday morning.

GOP Contenders and Pretenders
It’s way too early to get hung up on the polls showing support, and lack of support, for many of the Republican presidential hopefuls. We’re still about a year and a half out from the election. An eternity in political years. At this same point in time in prior elections, we wouldn’t have found strong and cohesive support for eventual winners such as Jimmy Carter, Ronald Reagan or Bill Clinton, so it would be a mistake to conclude what will happen during the Republican nomination process based off of the early polls.

For the last year the media has talked about the big four: Mitt Romney, Sarah Palin, Mike Huckabee and Newt Gingrich. Two aren’t running, and Gingrich will be a non-factor. He had no chance before a series of missteps sabotaged his campaign. I’ve always felt like it was Romney’s race to lose, and that he would do just that. Lose.

If you had asked me a couple months ago, my prediction would have been that the eventual nominee would come from a handful of governors such as Mitch Daniels, Chris Christie, Haley Barbour or Tim Pawlenty. But this dynamic changed significantly when three of the four decided not to run, and Pawlenty has failed to gain any traction towards the nomination. It’s still too early to know for sure, but Pawlenty just doesn’t look like he can excite either the Republican establishment or the Tea Party activists. Most of the rest of the field looks unelectable, but I would again issue the warning that it’s far too early to draw such conclusions.

Dick Morris has an interesting analysis of the nomination process. He describes that the Republicans are currently in the quarter finals where they will narrow it down to one establishment candidate, and one more conservative candidate. Morris lists Romney, Pawlenty and Jon Huntsman (who has informally announced his intention to enter the race) as the likely establishment candidates, with Romney as the most likely winner from this group. He also lists Michele Bachmann or Herman Cain, and to a smaller degree Gingrich, as the most likely to emerge as the main opposition to Romney. Dick’s analysis only considers those who are currently running.

Personally, I believe that Bachmann, Cain and Gingrich are all unelectable. But I’ve been wrong before. I wasn’t convinced that Americans were ready to elect a black president, and am glad to admit that I underestimated the American people.

My prediction? I think it’s incredibly likely that somebody else is going to enter and impact the race, with the most likely being Rick Perry, the governor of Texas. The Tea Party activists will like his track record of creating jobs in Texas. And he could appeal to many in the Republican establishment. Truthfully, I know little about Rick Perry, and am not endorsing him, and won’t bother spending any time researching him until he officially declares his intentions. But if I was a betting man? I think Perry has a very strong chance to win the nomination given what we know about the current field.

So now I’ve ignored my own warnings about coming to conclusions this early in the process.

Economy is in Bad Shape
According to DNC party chairwoman Debbie Wasserman Schultz: “We own the economy. We own the beginning of the turnaround and we want to make sure that we continue that pace of recovery, not go back to the policies of the past under the Bush administration that put us in the ditch in the first place.”

This pace of recovery? You mean the 1.8% economic growth this last quarter and the rise in the unemployment numbers?

This does seem to fly in the face of President Obama’s continued assertion that the current economic conditions remain Bush’s fault. I’m glad to see one Democrat stand up and admit that their party owns the economy. They do. Expect to see the Republicans use this repeatedly against the Democrats for the next year and a half.

For some strong analysis on the current state of the economy, read this from Martin Feldstein in the WSJ. I don’t completely agree with his comments on the stimulus, but overall he’s right on the money. The strongest paragraph:

The economy will continue to suffer until there is a coherent and favorable economic policy. That means bringing long-term deficits under control without raising marginal tax rates—by cutting government outlays and by limiting the tax expenditures that substitute for direct government spending. It means lower tax rates on businesses and individuals to spur entrepreneurship and investment. And it means reforming Social Security and Medicare to protect the living standards of future retirees while limiting the cost to future taxpayers.

Feldstein was the chairman of the Council of Economic Advisers under President Reagan, and is a professor at Harvard.

Weiner-Gate is Over, We Think
Yesterday afternoon, Anthony Weiner announced his resignation from the House of Representatives. I don’t want to spend a lot of time rehashing what happened. As long as we have politicians, we will have political scandals. It happens in both parties. It’s happened before. And it will happen again.

But there are a couple things we should learn from this:

1. Don’t take on the media. Gary Hart was the front-runner for the Democratic in 1988. When reports started to leak about his infidelity, Hart dared the media to follow him. And follow him they did. What was Hart thinking? Who knows. But the media quickly got pictures of Hart with Donna Rice, and Hart’s political career was over.

Weiner thought that he was smarter than the media, and could lie his way out of his mess. What was he thinking? Who knows. He basically dared the media to dig up the truth with his ongoing press conferences and interviews. You can’t sit there and blatantly lie to the media and expect even the most liberal of media outlets to ignore you forever.

2. Tell the truth. Isn’t this something we were all taught as children? The lesson should be simple. Tell the truth and throw yourself on the mercy of the American people. Overall, we’re a forgiving people. I suspect that Weiner could have weathered the storm if on that first day he had just said “I screwed up. I have told my wife what I’ve done, and we will work through this. I apologize to everybody…” The mainstream media would have been happy to brush this story aside. Some rightwing bloggers would have hung on for a week or two, but it likely would have gone away.

3. Moral leadership from our politicians is rare. And I struggle with this a bit. We should hold our elected officials to high standards. Yet I’m tired of career politicians, and would like to see term limits placed on Congress. And if we want to elect the best people to these offices, we will need to overlook a few skeletons in their closets. I could have overlooked this behavior in Weiner if he hadn’t so brazenly come out and lied about it.

Just ask Richard “I am not a crook” Nixon. The truth will come out, and you better be on the right side of it.

In my last post I pulled data from our history to illustrate how even very high tax rates on the rich do not lead to larger tax revenues compared to GDP. We’re tried it and it doesn’t work.

Another argument I’ve heard from the far left is that our country is not broke. We have plenty of money. It’s just that all of the money is being hoarded by the few at the expense of the many. I am open to the discussion that a large portion of our wealth is held by just a few people. And we badly need tax reform in this country. No, not just reform. We need a tax overhaul. But that discussion will wait for another day. Today we need to discuss this myth that if only we could take all this money from the rich we could afford our current level of spending. We could afford health care, Social Security, Medicare, Medicaid and much more. If you believe economists like Paul Krugman, we could afford to exponentially expand the government to take care of even more people if only the rich didn’t have all of our money.

You must watch this video from conservative Bill Whittle:

Now I haven’t fact checked every piece of information in here, but it’s certainly inline with the data I know about our wealth, our resources, the size of our federal government, and tax collections. I did some googling to see if I could find articles about the inaccuracy of this information. I didn’t find any.

Matter of fact, here’s an article from Walter E. Williams, a professor of economics from George Mason University discussing the facts in this video.

On a personal note, I do have one issue with this video. I’m not big into political correctness, but why is it OK to bash fat people? We can’t make fun of Jews or Muslims. We can’t make derogatory comments about blacks or Hispanics. As Kobe found out, we can’t use gay slurs in regards to officials. So how come it’s OK in our country to bash fat people? Whittle could have made this same argument without the personal comments about Michael Moore.

And thanks to Bruce for sending me a link to this video.

I’m going to take a quick detour from economics, to talk about, the economy. Too often we forget about our past. We can learn a lot just by looking back.

During the ’80s, President Reagan was spending lots of money building up our military. And a democratically controlled Congress was spending lots of money on everything else. By the early ’90s we were drowning in debt, deficits, a struggling economy, and unemployment was pushing 8%. Sound familiar?

Much of the 1992 presidential election campaigns were focused on these issues. As then Governor Bill Clinton so eloquently described, “It’s the economy, stupid.” And who can forget Ross Perot and his famous charts? As a third party candidate and founder of the Reform Party, Perot garnered almost 19% of the popular vote with his simple themes. For Perot, the math was simple. To get out from under the deficits and debts, we must increase taxes, and decrease spending. He also talked about tax reform, and entitlement reform, as necessary steps for fixing our economy.

In ‘92 we elected Bill Clinton, who came into office having won only 43% of the popular vote. Dick Morris has often told the story about how Clinton wanted to work with the republicans to pass bipartisan legislation. But the democrats in Congress told him no. That this was their chance to pass their agenda. After two years, the people were fed up, and voted in a new Congress filled with the likes of Newt Gingrich and his fiscal conservatives.

It was the fiscal conservatives in Congress and Bill Clinton who created the prosperity of the late ’90s. How did they do it? They constrained government growth. They passed pro-business legislation. And they tackled entitlement reform — in this case, welfare reform.

The result? Unemployment dropped to its lowest rates since the ’60s. And budget deficits became budget surpluses for the first time since the ’60s.

So how does this compare to today? We have surpassed $14 trillion in national debt. We have a projected budget deficit this year alone of more than $1.6 trillion. And unemployment remains well above 8%.

The president says that he’s concerned about our debt and our deficits. He went so far as to put together a bipartisan debt commission headed up by Alan Simpson and Erskine Bowles. Much like Ross Perot in the ’90s, the debt commission has recommended budget cuts, tax increases, tax reform and entitlement reform.

President Obama has completely ignored the recommendations of his own commission. He has provided us with a long-term budget plan that will double our national debt. And today, Congress can’t agree on a few billion in cuts. We’re still negotiating over the 2011 budget because the democrats never bothered to pass a budget LAST year when they controlled both houses in Congress and the White House!

So how do we fix our problems? Constrain government growth (cut spending). Develop pro-business legislation, which should include repealing ObamaCare. Entitlement reform. And tax reform. Sound familiar? It’s worked before.

Enter the Paul Ryan budget plan. I have not read it yet, and am not endorsing it. But he is on the right path from what I have seen.

Much like the left did during the ’90s over welfare reform, liberals will demonize the right over entitlement reform. A member of Bill Clinton’s staff, Peter Edelman, resigned under protest over welfare reform, decrying that it would throw a million children into poverty. On the contrary, within five years, child poverty declined by more than 2.5 million. Welfare reform is now championed by the left as a great accomplishment under Clinton.

Similarly, expect the left to accuse Ryan of throwing the poor and elderly under the bus with his “extreme” budget cuts and entitlement reform. It’s already started. It will get loud. It will get messy. But entitlement reform is necessary if we want to fix our short-term and our long-term economic problems. We can’t cut enough “discretionary” spending to dent the deficits. We need smart, long-term solutions. And we need them now.

Today let’s discuss the stimulus package, and the predictions made by the CBO. And in particular, how supporters of the stimulus bill continue to cite the CBO for writing that the legislation created millions of jobs. This will all tie into Eldridge Economics. Eventually.

First let’s go back to the beginning. In late 2008 during the election, the economy was stumbling. We were headed into a recession. Politicians from the left and the right agreed that something needed to be done. The President developed his economic stimulus plan. It was originally estimated that the bill would cost $787 billion. Two of the President’s key economic advisers, Christina Romer and Jared Bernstein, famously predicted that the stimulus bill would keep the unemployment rate below 8%. There were critics of the bill.

Hardcore Keynesians: There were those on the far left, including the New York Time’s chief economist and columnist Paul Krugman, who advocated for a $2 trillion stimulus package. Remember, according to Keynesian Economics, the more money the government spends, the more the GDP will grow, and the more jobs are created.

Free Market Economists: There was a group on the right, like some of  the economists at the Wall Street Journal and Investor’s Business Daily, who warned that the stimulus package would hurt the economy and make things worse. That we would be better off doing nothing than passing the President’s bill. Critics also explained that the bill was more about big government spending than economic stimulus. Here’s one example from the WSJ.

The CBO: And then there was the CBO somewhat in the middle. Using their Keynesian model, they predicted that the stimulus bill would indeed create millions of jobs. But they ALSO warned that by the end of 2011, there would be little NET job growth. In other words, we were going to spend nearly $1 trillion to end up at the same place a year and a half later.

President Obama said that the stimulus was the right bill at the right time. It was necessary, and must be passed immediately. Congress obliged and passed the bill.

So what happened? Things got worse. Unemployment escalated towards 10%, and has continued to hover around 9.5% for months.

The President and the White House did what all politicians do. They engaged in revisionist history. They had to admit they were wrong to prove that they were right. How were they wrong? Because the economy was worse than they thought. How were they right? Because their stimulus plan created millions of jobs and kept us from a depression.

How can they do this with a straight face? Because Keynesian Economics says that government spending creates jobs. And to admit that it did not would be to admit the Keynesian Economics is wrong.

But the CBO Says That It Created Millions of Jobs!
Defenders of the White House continue to quote the CBO who wrote as late as this last November that the stimulus bill “Increased the number of full-time-equivalent jobs by 2.0 million to 5.2 million compared with what would have occurred otherwise.” The quote is from this CBO report.

The problem with citing the CBO? They don’t research and attempt to determine whether or not the bill actually created these jobs. So how did they come to their conclusion? Because they continue to plug the numbers into the same Keynesian formula. The CBO uses multipliers to predict how government spending increases GDP. They have different multipliers for different ways the money is spent. Brian Riedl from The Heritage Foundation (a rightwing organization) has explained this in detail. Here’s a link to one of his articles.

With the CBO’s most recent report they adjusted their predicted cost for the bill to be $814 billion. They plug the government’s expenditures into their model. And they predict the growth in GDP, and predict how many jobs are created FROM the growth in GDP.

So in other words, the stimulus bill lives in a vacuum. If the model predicts that the bill will create two million jobs, and the economy loses four million jobs, then their conclusion is that without the bill the economy would have lost six million jobs. Or if the economy creates five million jobs, their conclusion is that the economy would have only created three million jobs without the stimulus bill. So no matter what happens in real life, they continue to predict that the stimulus bill creates jobs.

If you read the entire report, they explain their methodolgy: “The Congressional Budget Office (CBO) based its estimates of the economic effects of the American Recovery and Reinvestment Act of 2009 (ARRA) on information from various sources: macroeconometric forecasting models, general-equilibrium models, and direct extrapolations of past data.”

They go on to explain, “However, the reported number of jobs funded is not a comprehensive measure of ARRA’s effect on overall employment, or even of those provisions of ARRA for which recipients’ reports are required. The actual impact could, in principle, be significantly larger or smaller than the number of jobs reported.”

So who was right? The economists from the WSJ and IBD made the most accurate predictions, though this doesn’t inherently prove that the stimulus bill was bad, or that it made things worse. The economy does not exist in a vacuum. You cannot plug the same numbers into the same formulas and expect the same results when the economic environment is constantly changing. And there are times that government spending will NOT grow the GDP and create jobs, despite what Keynesians would like you to believe.

Next we’ll discuss the role of government in our economy.

While Wisconsin politics and union protests dominate the news, there’s still an underlying and equally important story. The economy is struggling. Nothing new about that, but a few stories have recently caught my attention.

1. Supporters of the White House continue to insist that the stimulus bill was effective. Why? Because the CBO says that the bill created millions of jobs. But that’s not really what the CBO said. We’ll come back to this later.

2. New stories have been warning us that budget cuts (from the GOP) will hurt the economy and could send us into another recession.

3. And a twist on this same story, that a government shutdown will hurt the economy. And that hurting a fragile economy could have dire consequences.

All of these stories have a common component — the belief in Keynesian Economics. And whenever you point out the problems with Keynesian Economics, you get blasted as a lover of Trickle Down Economics. Here’s a quote from a conversation I had with some friends on Facebook yesterday: “That trickle you feel is Boehner pissing on your leg and tell(ing) you it’s raining.”

It will take me more than one post to get through some thoughts on the economy. I’m not proclaiming to be an economist. More of an econo-hobbyist. Here’s part one.

Keynesian Economics
I will try not to bore you too much, and keep this as simple as possible. Keynesian Economics advocates a mixed economy, predominantly private sector, but with a large role of government and public sector. And for the most part, the theory is pretty simple. You can read more about it here on Wikipedia.

What we’ll focus on today is what Keynes viewed as the primary reason for a recession, and his recommendations for getting out of a recession. Keynes viewed a recession as a result of shaken consumer confidence that causes consumers to save instead of spend. Excessive savings (beyond typical savings during a normal economy) from consumers slows the exchange of money thus creating the recession.

Keynesian theory recommends stimulating the economy through government spending and/or adjusting the money supply (printing money and/or lowering interest rates). Our federal government has been engaging in increased government spending and expanding the money supply. Keynes was one of the first economists to advocate deficit spending as part of a fiscal policy to cure an economic contraction.

Keynesians believe that if you increase government spending during a recession, what you’re really doing is taking the consumer’s money that they were saving (and not spending due to shaken consumer confidence) and injecting it into the economy. And that every dollar spent in the economy is subject to the “multiplier effect”. Basically, that when a dollar is spent by either the public or private sector, it increases total spending by a multiple of that increase. So when the government spends a dollar, it increases GDP (gross domestic product) by MORE than a dollar. And increases in GDP lead to increases in employment. (This will be important when we discuss the CBO’s statements on the stimulus bill.)

And reversely, if you cut government spending through budget cuts or closing the government, you are reducing GDP, and ultimately reducing employment (increasing unemployment).

Theory vs Reality
I’m not in complete disagreement with Keynes. But more in it’s application. So let’s start with a simple example. Let’s say the multiplier is 2.5 times. So if the government spends $1, we add $2.50 to GDP. If the government spends $800 billion, we add $2 trillion to GDP (that’s $800 billions x 2.5).

So if you subscribe to this theory, you get the same outcome from the stimulus no matter what else is happening in the economy. Does the country have $1 trillion or $14 trillion of debt? Doesn’t matter. Is the federal government imposing thousands of new regulations on the business community or streamlining regulations for business? Is the government viewed as anti-business or pro-business? Doesn’t matter. Do we have strong exports or decades of trade imbalance? Nope, doesn’t matter. Are we importing billions of barrels of oil at $100 per barrel or are we energy independent? Still doesn’t matter.

This theory doesn’t account for the decrease in GDP when an extra dollar is taken out of the private sector. And this theory doesn’t account for the repercussions of borrowing money.

Nothing matters but the multiplier and how much additional money the government injects into the economy.

The problem is that the economy doesn’t exist in a vacuum. There are forces, including other government policies, that are impacting the economy simultaneously. I think it’s entirely possible that in a different economic climate, that the outcome of the stimulus bill could have been considerably different. Or at least viewed differently.

But that will have to wait. Still more topics to cover, and we’ll try to cover them soon. The CBO’s projections. Understanding the deficits. The stimulus package. And what role the government should play in the economy.

Until next time.