Bacon's Rebellion

Alert! Alert! Danger! Danger! Bacon is playing with fire!

Once again, I am experimenting with new media forms– this time making a brief animated “movie” based on topics debated on this blog, vivid proof that I have too much time on my hands. All my prejudices are on display. I make no effort to be fair and balanced. I don’t bother to fact check. But I do throw in a few yucks. Enjoy.

(If you can come up with better one-liners, I will plug them into the script and re-publish the movie.)

Popular histories about the Confederate States of America can be dodgy, as a recent controversy over a school textbook approved for Virginia fourth-graders shows.

American liberals are big fans of the European welfare state. They point to European models of national health care, rich pensions and generous unemployment benefits as worthy of emulation in the United States. Europeans may not make as much money as Americans, the liberals say, but they have created a more humane way of life.

What you don’t hear from the American left these days is much acknowledgment that the Europeans are backpedaling as fast as they can. There is a reason that transportation and oil-refinery unions have been striking in France and government workers are rioting again in Greece. When Greece nearly defaulted on its national debt last year, governments got a glimpse of what would happen when the money ran out, and they began enacting some of the toughest austerity measures of the post-World War II era.

While France and Greece have grabbed the headlines – protesters setting things on fire makes a visual the media can’t resist – the most important case study in austerity economics may be the United Kingdom. Taking out the carving knife, the newly elected Conservative Party government is dissecting government with a vigor not seen since Margaret Thatcher’s heyday.

The secret to restoring the United Kingdom’s economic vitality, says Prime Minister David Cameron, is to slash public spending and reinvigorate the private sector. The Conservative Party plan calls for a combination of spending cuts, tax increases and targeted tax cuts for business that would reduce Britain’s borrowing by $180 billion a year by 2015 – a fiscal consolidation equivalent to 6.2 percent- of that year’s expected gross domestic product (GDP).

The draconian measures defy the Keynesian doctrine that the best way to jump-start the economy during an economic downturn is to increase deficit spending. While deficit spending may give the economy a short-term jolt, evidence is accumulating that large ongoing deficits cause serious long-term damage, especially when the national debt is already high. Carmen M. Reinhart and Kenneth S. Rogoff have argued famously that when the national debt of advanced nations exceeds 90 percent of GDP, economic growth tends to slow considerably. A more recent study published by the World Bank identified a tipping point at a 77 percent debt-to-GDP ratio.

With a 2010 debt-GDP ratio of 72.7 percent, the United Kingdom is near that tipping point. (The United States is well past it.) Preaching that the nation faces an “age of austerity,” Mr. Cameron has called upon Britons to show restraint (no riots, please) and adopt the spirit of self-sacrifice their forebears displayed during the two world wars. Expecting to sack more than 600,000 government jobs, Conservatives are gambling that whacking state spending in a weak economy will restore market confidence and encourage private businesses to step up their investment and hiring.

Because government spending accounts for such a large share of the economy in some depressed regions of the United Kingdom, Conservatives hope to prime the pump of private investment by pumping funds into regional industry clusters. The track record of such industrial policy is not encouraging, but politically, it may be necessary to prop up the economy beyond the confines of the prosperous London metropolitan area. With the exception of the regional stimulus spending, however, the United Kingdom is hewing to a budget discipline that U.S. conservatives can only dream about.

No political figure of Mr. Cameron’s stature has spoken as honestly to Americans, nor has anyone prominent – outside of Wisconsin’s Republican Rep. Paul Ryan – offered a cost-cutting program as far-reaching. The House Republicans’ Pledge to America would roll back spending by roughly $100 billion a year, to pre-stimulus, pre-TARP levels. But to achieve budget balance over the course of an economic cycle would require spending cuts on the order of $1 trillion yearly. Meanwhile, the U.S. political class and its intellectual enablers remain in steadfast denial. Progressives such as Robert Reich and Paul Krugman argue that the United States needs more government spending, not less.

Americans should watch the outcome of the English experiment closely. Republicans likely will spend the next two years crossing swords with President Obama, a dogged defender of the leviathan state. The key electoral test will come in the presidential election of 2012. By then, the results of the English experiment should be in. Either it will be a model worth emulating or it will prove to be an economic and political failure. I’m betting austerity will pay off for the United Kingdom. I can only pray that the United States can embrace serious cost-cutting before the gravitational tug of our massive debt pulls the economy into oblivion.

(This column was published originally in the Washington Times.)

When Meredith Whitney speaks, Wall Street listens. Whitney is the financial analyst who first warned that the real estate crash spelled disaster for the U.S. banking system. In a new, 600-page report, “The Tragedy of the Commons,” she sounds the alarm for a second-wave financial crisis afflicting state and local government.

Whitney sees scary parallels between the fiscal condition of states/municipalities and the banks, including excess leverage, off balance-sheet financing, and a lack of transparency. As falling real estate values continue to undermine property tax revenues, and as federal stimulus funds dribble to a halt, she says, heavily indebted municipal governments will find themselves in deep trouble.

Two of the 15 states studied — Texas and Virginia — get positive ratings under Whitney’s rating system. That is reason for Virginians to take some grim satisfaction but no excuse to get complacent. We have issues galore to deal with, including rising Medicaid costs, schools that don’t teach, $620 million owed to the state retirement system, and a transportation-funding mechanism in worse repair than Interstate 95′s creaky bridges. Unlike previous economic recoveries, in which gushing revenues replenished state treasuries, Virginia will enjoy little respite from fiscal stress in the decade ahead.

The years of plenty have passed. The years of hardship are upon us. We can no longer afford government-as-usual. We cannot tinker on the budgetary margins with incremental process reforms and tweaks to line items. We must thoroughly rethink how we deliver government services. If we fail to do so, circumstances will force the harsh decisions upon us.

Even as Virginia’s lawmakers grapple with short-term challenges, they should not overlook a formidable long-term threat to the state’s fiscal well-being: a federal government hurtling toward its own ignoble demise. As I argue in my book Boomergeddon, by the mid-2020s, the federal government itself will be so deeply indebted that it is highly likely to go into default. Uncle Sam then will face a budget gap equal to some 40 percent of the budget, which it will try to close through some combination of cutting spending, raising taxes, repudiating the debt, or cranking up the printing presses. The result will be economic chaos, if not another Great Depression-style meltdown.

To some, the idea that the federal government faces default within 15 years smacks of “deficit hysteria.” But look at the facts. Even the Obama administration’s own 10-year budget forecast projects that annual deficits will never shrink below $700 billion, and that the national debt will increase by $8 trillion — to $21 trillion — by 2020. The International Monetary Fund declares that the ratio of U.S. debt to the size of its economy will reach 110 percent by 2015, about the same as Greece’s when its debt woes sparked Europe’s sovereign debt crisis.

Moreover, President Obama’s forecast is based upon a number of optimistic assumptions, not the least of which is that Congress will stop spending money like a Valley Girl with daddy’s credit card. Making a different set of likely tax and spending assumptions, the non-partisan Concord Coalition sees total debt exceeding $28 trillion by 2020.

Obama’s economic growth forecasts are shaky, too. His 10-year projection assumes economic growth averaging 3.4 percent annually, with no recession — an economic performance comparable to the Internet-fueled boom of the Clinton years. But there is no sign of a boom in the making. Indeed, the U.S. will be fortunate to avoid a double-dip recession. Plugging different growth assumptions into the Obama model — 1 percentage point slower economic growth through the decade, plus a mild recession toward the end — yields a national debt of $29 trillion by 2020.

Likewise, the Obama budget model is highly sensitive to changes in interest rates. The president’s number crunchers assumed that interest rates on 10-year Treasuries will never climb higher than 5.3 percent during the 2010s. But if 10-year bonds returned to the rate of the early 1990s, around 10 percent, the national debt could exceed $36 trillion! If the federal government somehow survives the gantlet of the 2010s, it then faces the wave of 78 million retiring boomers as well as the drawdown of Social Security’s (anticipated) $4.3 trillion trust fund, forcing the Treasury to borrow trillions more.

Per capita federal spending in Virginia is seventh highest in the nation. When Uncle Sam defaults, Virginia will feel the anguish more than most. The commonwealth must begin now preparing for that day. Gov. Bob McDonnell’s Commission on Government Reform and Restructuring is a good place to start. But it will take a lot more than privatizing ABC stores to diversify the economy and bullet-proof the commonwealth’s finances.

(This column was first published in the Richmond Times-Dispatch.)

From a Wall Street Journal article on government austerity and economic development in the United Kingdom, making the point that efforts to rejuvenate regional economies have a mixed track record in the UK and elsewhere:

Stuart S. Rosenthal, an economics professor at Syracuse University, remembers driving through Virginia in 1997 and seeing a sign saying, “You are entering southwest Virginia’s high tech corner” [sic — the sign said “corridor].

“And all I could see was cows and farms,” he said. Recent employment data shows that aside from one pocket, little has changed.

Ouch!

Are those signs still up? If so, someone please take them down.

Virginia has long been in the forefront of using privatization as a way to finance public projects without draining public budgets. It has been touted as a way to have your cake and eat it, too, by both Democrats and Republicans.

Gov. Bob McDonnell has repeatedly asserted that the government of Virginia managed to close a $1.8 billion shortfall in the Fiscal 2010 budget “without a tax increase.” (See his column in the Wall Street Journal.) That may be true from a technical viewpoint but it leaves a few things unsaid. I won’t even get into the complex deal by which the commonwealth effectively borrows money from the Virginia Retirement System and repays the sum as part of a larger pension overhaul. More to the point is the matter of some $95 million in higher “fees” in the biennial budget, plus multimillion-dollar reductions in targeted tax breaks that bring the total to $137 million.

The accompanying chart from the House Appropriations Committee shows the grab bag of additional fees inserted by the General Assembly into the budget legislation during the last day of the 2010 session. There are two issues here.

First, when is a “fee” not a fee but a tax increase? I would argue that a fee becomes a tax when the revenue generated by the fee exceeds the level needed to provide the related government service. By that definition, how many of the above are fees and how many are taxes? I don’t know. But an honest rendering of accounts probably would suggest that the General Assembly did increase some taxes.

The second issue is the manner in which these fee increases and tax break deductions were enacted. According to Del. Robert G. Marshall, R-Manassas, they were jammed into a much larger bill at the last minute. Legislators never had an opportunity to vote them up or down on their individual merits. In other words, there was minimal transparency. It makes me sour and argumentative to see fees and taxes increased in this manner.

Marshall has a solution. He proposes an amendment to the state constitution as follows:

Any law that appropriates funds shall not contain any provision that imposes, continues, increases or revives any tax, fee, or fine, nor shall any such law contain any provision that reduces or eliminates any credit, deduction, or exemption associated with any tax, fee or fine.

Personally, I happen to dislike tax credits and exemptions as a tool of public policy and think many if not all of them should be eliminated on the grounds that they provide preferences not available to the general public and that they reduce the tax base. On the other hand, I also believe in transparent government. If anyone has an argument in opposition to Marshall’s amendment, I would like to hear it.

(Marshall provides a bit more information about his proposal here.)

This Tuesday, the Lawn at the University of Virginia was a portrait of early fall beauty. Inside the equally-magnificent Rotunda, Chief Rabbi Lord Jonathan Sacks spoke on “Difference and Democracy in the Post-Secular World.”

A common refrain on this blog that gains more currency as frustration with the anemic economic recovery grows is that regulation of business is somehow to blame.

The Miller Center of Public Affairs at the University of Virginia has issued an important new report on transportation, “Well Within Reach: America’s New Transportation Agenda.” The report is the brainchild of former Gov. Gerald Baliles, the last governor of Virgina to think seriously about transportation.

I haven’t had time to read it closely enough yet to provide any thoughtful comments, but a quick glance suggests that the report does incorporate some new thinking, as evidenced from this quote in the executive summary: “Funding for the Highway System was intended to come from drivers, but the current fuel tax no longer creates a direct link between charges and use. We must return to a ‘pay as you go’ system.”

Paul Krugman advanced the argument in a recent NYTimes column — I kid you not — that there has not been a big expansion of government spending under the Obama administration. America needs more spending and bigger deficits in order to gin up some real stimulus!

I know, I know, Krugman is an easy target — like shooting fish in a barrel. But he won a Nobel Prize, forcrissake, and he’s a columnist in the New York Times, a newspaper that some people take seriously. What’s more, he’s so insufferably smug and contemptuous, he needs to be knocked down a peg or two. So, I do my best in the video above.

(Show mercy on me for the technical quality of the video. YouTube and video-making is a brand-new thing for me. But go ahead and thrash away at the facts and logic expressed therein.)

One fact coming out of the Tea Party convention hasn’t really come out on these blog postings, but it is probably the most important one: Kenneth Cuccinelli is the big beneficiary.