Author Archives: Norm Leahy

Occupying Richmond

by Norm Leahy

On or about October 15th, the “Occupy [insert city name]” phenomenon intends to make its Richmond debut. The nascent group has quite a large Facebook presence — larger than what the tea parties were able to muster at their height back in 2009 — and reading through the postings provides an education in online organizing. It’s also a sometimes hilarious, sometimes depressing, trip through the fever swamps.

There are a few earnest folks trying to herd the cats into Richmond’s Monroe Park this weekend for an organizational meeting to help determine why they intend to conduct an occupation and where that occupation will take place. Early on, it was supposed to be near the Federal Reserve building in downtown — completing the echo of the tea party protests held near there in 2009 and 2010. Or maybe it won’t be there. In one of the Facebook posts, we learn:

Kanawha Plaza has not been decided by consensus as our place of occupation. We will, however, reach a modified consensus at our next *full* General Assembly meeting on October 15th; Monroe Park, 4pm. Come back to stay informed on additional General Assembly/Working Group meetings that arise between now and then. This is our time, let’s seize it in solidarity.

The resulting discussion would make Monty Python proud.

Yet under the conflicting visions, incompatible agendas and vague ideas, there’s no denying that, like the tea partiers before them, this potential gathering has a problem with what they see as an unaccountable force lording it over the rest of us. It must be stopped.

But what is this force? Is it the Federal Reserve that insists on propping up a system that has become rotten? Is it the financial institutions that were rescued from an abyss of their own making with taxpayer dollars? Or is it the larger corporate world, parts of which are increasingly wed to, and dependent upon, government for their livelihoods?

It seems to be all of these things — but we’ll have to wait for the reports of the working groups to be sure.

Until those minutes are read, these would-be occupiers do seem to have a lot in common with elements of the tea party movement. Those earlier protesters had no love for the bailouts, the Fed or government giveaways to corporations. But the similarities tend to blur after that.

The tea partiers, in general, wanted and continue to advocate for less government. If the list of grievances published by the occupiers of Wall Street offers any guide to what this new order of protesters wants, it’s more government and less (much less) of what they see as corporate over-reach. Consider:

They have poisoned the food supply through negligence, and undermined the farming system through monopolization.

They have profited off of the torture, confinement, and cruel treatment of countless animals, and actively hide these practices.

They have continuously sought to strip employees of the right to negotiate for better pay and safer working conditions.

They have held students hostage with tens of thousands of dollars of debt on education, which is itself a human right.

They have consistently outsourced labor and used that outsourcing as leverage to cut workers’ healthcare and pay.

They have influenced the courts to achieve the same rights as people, with none of the culpability or responsibility.

They have spent millions of dollars on legal teams that look for ways to get them out of contracts in regards to health insurance.

They have sold our privacy as a commodity.

And so on. The irony, intentional or not, is that not a few of these grievances are the result not of corporate greed, but individual choice. Holding students hostage to loan debt? Sorry, you (or your folks) singed for those loans. We can debate — and often have here at the Rebellion — the costs of higher education. The beef these folks have is with the schools, not corporations. And also with themselves, for choosing to sign on the dotted line.

Have evil corporations sold your privacy down the river for their gain? Undoubtedly some have. That would include Facebook, the platform these folks use to organize. But also remember — Facebook and others can only sell that which you give them. Want to take back your privacy? Here’s small tip: never fill out warranty cards. Their real function is to build a marketing database, not to give you better service.

But let’s also hope that these protesters understand that what they, the tea parties and others rail against is not new. Whether it was the king and his ministers, the Bank of the United States, the Freemasons, Demon Rum, the railroads, the gold standard, war profiteers, the Red Menace or any other vague, faceless, utterly nefarious entities, bad economic times breed discontent. Even it what some consider the best of times, there are those who seethe below the surface, hoping for revolution.

It’s the American way. And it usually results in folks getting the bile out of their systems and then going back to their own thing until the next perceived crisis rears its head.

High Speed Rail’s End

by Norm Leahy

The latest issue of Ken Orski’s “Innovation News Briefs,” delivers a blow to the hopes of those who thought that, one day, high speed trains would zip between Washington, DC and pokey old Richmond:

By including only a token $100 million for high-speed rail as a “placeholder” in their FY 2012 budget recommendations (a sum that is likely to be further cut in the House-Senate negotiations on the FY 2012 appropriations), Senate appropriators have done more than merely declare a temporary slowdown in the high-speed rail program. They have effectively given a vote of “no confidence” to President Obama’s signature infrastructure initiative. Along with their House counterparts who had denied the program any new money, the Senate lawmakers have sent a bipartisan signal that Congress has no appetite for pouring more money into a venture that many lawmakers have come to view as a poster child for wasteful government spending.

That doesn’t mean the feds aren’t trying to spend whatever monies they still have at their disposal. Quite the contrary:

In the meantime, the Department of Transportation has rushed to distribute the balance of the authorized HSR dollars, lest Congress decides to rescind any funds that remain unobligated. Continuing its practice of scattering money far and wide rather than focusing it on one or two worthwhile projects, the Federal Railroad Administration approved in September over $ 480 million worth of planning, engineering and construction grants “to improve high-speed and intercity passenger rail service” in 11 states. The beneficiaries are New York, Texas, New England (Maine, Vermont, Rhode Island, Connecticut), North Carolina, Virginia, Washington State, Oregon and Pennsylvania. The awards range from $149 million to New York State to as little as $13 million to the state of Oregon, and they average under $40 million per individual grant. It remains to be seen how quickly the recipient states will put these funds to work— and what kind of service improvements these grants will bring about.

Probably not much. As BR’s own Peter Galuszka noted in this Style Weekly piece from 2010, bringing the rails that run through Richmond and the preferred Main Street Station site up to high speed snuff would cost anywhere between $122 million and $600 million. The $44 million federal grant given to Virginia is reserved for “environmental analysis and preliminary engineering.”

In other words, the trains won’t be getting faster, but there will be a few more studies published.

Making the light rail boondoggle even bigger

By Norm Leahy

The Virginian-Pilot is on board with an expansion of Norfolk’s short, costly and scandal-plagued light rail line. But in a fine display of Babbittry, we’re not supposed to pay attention to the scandals, cost overruns, delays and such. Those petty concerns only get in the way of progress. And how to pay for it all? The paper manages to mention, in passing, that money for such an expansion may be hard to come by. But that’s a secondary consideration compared to the planning that needs to take place now for an even bigger, more costly system.

But before the planners, great and small, get too excited about adding on to their train set, Randal O’Toole has a few things about the existing rails that ought to be kept in mind. I’ll quote his post in its entirety:

Norfolk Virginia finally opened its light-rail line, and ridership “exceeds expectations” at 5,600 riders a day. Considering they run 212 trains a weekday, that’s just over 26 passengers per train. How many 40-passenger buses would have been needed to handle all that traffic?

Of course, the rail line exceeded expectations in many other ways as well. The 7.4-mile line was originally expected to cost less than $200 million. The final cost was at least $120 million over that. It was also supposed to be open for business in 2008. They exceeded that expectation as well. The original projection was for 10,500 weekday riders by 2021. They’ll have to double ridership to meet that. A lot of city and transit officials also expected the rail line would be a feather in their caps. Instead, they were lucky not to be tarred and feathered when they were run out of town over cost overruns.

Despite the underestimated costs and inflated ridership numbers, the Federal Transit Administration gave Norfolk light rail a “not recommended” rating in 2004. Too bad the agency changed its mind (or had its mind changed for it by Virginia’s congressional delegation). They could have saved taxpayers a lot of money on a truly wasteful project. But that’s the story of all light rail in a nutshell.

It’s also the theme of a classic Simpsons episode — “Marge v. the Monorail,” which gave the world this snappy tune. The mob (or in this case, the Pilot) has spoken!

Kaine leaps into the Ponzi Pool

By Norm Leahy

I don’t begrudge Democratic Senate candidate Tim Kaine’s desire to stir-up the base with this meeting, or forum, if you prefer, on Social Security. It is amusing, though, to read the quote Wes Hester pulled from the Kaine campaign’s press release announcing the event:

A release from Kaine’s campaign announcing the Tuesday morning said that Perry “will no doubt promote the extreme Republican agenda which labels Social Security a ‘Ponzi’ scheme and seeks to privatize it.”

Damn those extreme Republicans and their wicked attempts to denigrate the most successful of entitlement programs…it puts them in the same league as that equally nefarious Paul Krugman:

“In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in.”

One can only imagine what Mr. Kaine will have to say about that…

(H/T: Don Boudreaux)

Paying for disaster relief

by Norm Leahy

Rep. Eric Cantor is taking a bit of heat for saying that any federal monies spent on disaster relief in the wake of Hurricane Irene should be offset with spending cuts elsewhere in the budget.

But consider the quotes in Anita’s piece, both from Rep. Cantor and from the group criticizing him, Virginia Organizing. First up, the hard-nosed Mr. Cantor:

“The federal government does have a role in situations like this. When there’s a disaster there’s an appropriate federal role and we will find the monies,” Cantor said. “But we’ve had discussions about these things before and those monies will be offset with appropriate savings or cost-cutting elsewhere in order to meet the priority of the federal government’s role in a situation like this.”

Which earned this retort from Virginia Organizing:

“We have truly reached a new low in American politics if Rep. Cantor is willing to use disaster relief as a political bargaining chip,’’ said Jay Johnson, a board member of Virginia Organizing. “Disaster relief is a necessary function of government and not something to be bartered with. …We are the richest nation in the world and should be able to respond to disasters with more dignity than someone bartering for a couch on Craigslist.”

Each side plays to type, but at bottom, both assume that the federal government has a role in disaster relief.

But does it?

For the truly hard-nosed, the answer is “no.” The federal government is no more responsible for paying for clean-up than it is for offering grants to cowboy poets. But so feeble has our notion of what is and is not the federal government’s proper sphere, that we assume — left, right and center — that our impoverished Uncle on the Potomac will arrive on the scene with cash, supplies and perhaps even a few second hand, formaldehyde-tainted trailers.

Once upon a time in America, the idea of the federal government providing any disaster assistance at all was highly suspect. Jack Balkin, writing after the Katrina disaster in 2005, unearthed a gem from President Grover Cleveland, who vetoed a bill allowing the Department of Agriculture to distribute free seeds to drought-stricken areas of Texas. In his veto message, Cleveland wrote:

I can find no warrant for such an appropriation in the Constitution, and I do not believe that the power and duty of the General Government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service [as with veterans, for example] or benefit. A prevalent tendency to disregard the limited mission of [national] power and duty should, I think, be steadfastly resisted, to the end that the lesson should be constantly enforced that though the people support the Government the Government should not support the people.

Cleveland’s reading of the Constitution is no longer in fashion (if it ever really was). As the Cantor quote above shows, even today’s most rock-ribbed conservatives are comfortable with an expansive reading of federal power. So…how can we possibly bridge the divide between Cantor’s desire to offset federal disaster relief spending with Virginia Organizing’s belief that any offsets are evil?

Aside from ditching the grants to cowboy poets, which wouldn’t do much, Sen. Tom Coburn’s ongoing series of pork reports offer millions of dollars of savings that could be funneled to disaster relief…if that’s where the worthies decide the money is better spent (rather than, say, on the feds’ buying additional limousines).

Coburn has found and continues to find so much frivolous federal spending that reaching Mr. Cantor’s offset goal is neither as difficult, nefarious or Craiglist-like as Virginia Organizing believes it to be.

Unless they really like the idea of having more federal limousines scurrying around the countryside…

Richmond Fed surveys show stagflation’s return

by Norm Leahy

The Richmond Fed has released its Fifth District Surveys of manufacturing and service sector activity and the outlook for both is rather bleak. Output is falling, as are employment and wages. But what’s showing signs of growth? Inflation.

From the manufacturing report, we get this somber news:

District manufacturers reported that raw materials prices increased at an average annual rate of 4.16 percent in August — up somewhat from their 3.41 forecast in July. Finished goods prices rose at a 1.46 percent pace — also somewhat above July’s reading of 1.18 percent.

Looking forward, respondents expected that the prices they pay will advance at a 4.54 percent pace, somewhat higher than July’s reading of 4.35 percent. Additionally, contacts looked for finished goods prices to increase at a 3.35 percent annual rate, also slightly above last month’s expected rate of 2.97 percent.

And from the service sector survey:

Price change in August sped up slightly, with overall service sector price acceleration at an annualized 1.03 percent rate in August; last month’s rate was 0.79 percent. Retail price growth moved ahead at a 1.66 percent clip, following July’s 0.75 percent pace. At services firms, the pace edged up to 0.93 percent compared to 0.86 percent a month ago. For the six months ahead, survey respondents looked for price change of 1.48 percent; in July, their outlook was for 1.34 percent. Separately, retail merchants looked for prices to increase at a 2.08 percent rate during the next six months, while non-retail services providers expected a 1.39 percent pace. A month ago, retailers expected a 1.20 percent rate of increase and services providers anticipated price acceleration of 1.40 percent.

Some observers, like Harvard’s Ken Rogoff, believe inflation is the one tool that could right the national economy:

…the only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery.

Savers have already taken a sustained hit from falling interest rates and, with the Federal Reserve’s explicit policy of maintaining a zero interest rate target through mid-2013, they have little hope for relief. So why not add to their misery with a bit of inflation? And as for debtors…well. We’ve gone out of our way to keep them whole, to little effect. So let’s redouble our efforts.

The Richmond Fed’s surveys, though, indicate that inflation is already here and retailers and manufacturers see it getting worse. Which means we may imbibe Mr. Rogoff’s elixir no matter what.

And for history buffs, what do you call rising inflation and weak economic growth? If you answered “stagflation,” the monster everyone assumed had been slain in the early 1980s, you win…but in the long run, we all lose.

The weak suit that could undermine challenges to the health care law

By Norm Leahy

Ken Cuccinelli is worried.

It’s not a familiar feeling for Virginia’s Attorney General. Mid-way through his first term in office, Cuccinelli has translated his firm conservative beliefs into a series of court cases challenging what he, and his supporters, sees as federal government excesses. So often has he taken the feds to court that Cuccinelli can joke about how many Obama Justice Department officials he knows.

But what has Virginia’s otherwise confident top lawyer concerned isn’t one of his court challenges, but a case rising out of the 6th Circuit Court of Appeals. In late June, a divided appeals court upheld the individual mandate that’s at the heart of the President’s health care law. But it’s more complicated than that. As Cuccinelli explained to me in an interview, Judge Jeffrey Sutton, appointed to the bench by George W. Bush, decided that the way the health care law is constructed might make it unconstitutional sometimes, but not in this particular case. Cuccinelli said that “This ruling is so narrow that I don’t know how much impact it’s going to have on other courts.”

But it was the first appellate court to rule in any of the 30 lawsuits currently pending against the health care law. Cuccinelli’s own case, Virginia v. Sebelius, was argued before the 4th Circuit Court of Appeals in Richmond three months ago.

The plaintiffs in the 6th Circuit case, the Thomas More Law Center and a group of individuals challenging the mandate, have filed an appeal to the United States Supreme Court. And that’s where Cuccinelli’s uneasiness begins.

“I am concerned about the 6th Circuit case because it has not been strongly argued by those plaintiffs.” Both the district and appeals court ruled against Thomas More’s challenge.

“For something this important, I’d like to see our side put its best foot forward,” Cuccinelli said. “I think we’ve demonstrated that we’ve got the best legal argument (in the Virginia case), and I’m comfortable with what’s come out of the Florida case in the 11th Circuit.

He should. Last week, the 11th Circuit Court of Appeals ruled that the individual mandate at the heart of the health care law was unconstitutional. At the same time, though, the court refused to invalidate the entire law. Federal District Court Judge Roger Vinson did just that earlier this year. Last December, District Court Judge Henry Hudson, who presided over the Cuccinelli lawsuit, held the individual mandate unconstitutional, but, like the 11th Circuit Court of Appeals, let the rest of the health care law stand.

There is one area where even courts siding with the Obama administration have been unanimous: none of them have bought the federal government’s argument that the financial penalty the law imposes on individuals for not buying health insurance is permissible under the Constitution’s grant of taxing power.

“Even Judge Sutton didn’t go along with that. And really, it’s at the core of our case, too, this notion that the federal government can basically force you to buy anything it deems necessary and impose a financial penalty on you if you don’t.”

Cuccinelli told me it’s possible the Supreme Court could ignore the appeal of the 6th Circuit ruling and wait until more appeals courts, like the 11th, have weighed-in. It’s also possible, he said, that the high court could take the 6th circuit appeal and then “reach down into the other appeals courts” and bring all the cases before it. Or it could have them run in parallel, or even decide to take them one at a time. “Nobody knows what they might do,” he said.

How might the Supremes rule? That’s another unknown. But when I asked Cuccinelli to address the calls on the right for Justice Elena Kagan, the former Obama administration Solicitor General, to recuse herself from any health care case that might reach the high court, he said there’s no indication she will do so. Earlier in the Virginia lawsuit, Cuccinelli’s office filed an appeal with the Supreme Court to take the case directly, skipping the court of appeals. The Supreme Court declined, but in doing so, Kagan made no move to remove herself from considering Virginia’s petition. That strongly indicates she will also be on the bench when a health care suit reaches the Supreme Court.

Cuccinelli expects a ruling “literally any day now” on the Virginia lawsuit and he stated that if he loses, he will appeal that “rather promptly” to the Supreme Court.

Connaughton changes his tune on the gas tax

by Norm Leahy

Virginia Transportation Secretary Sean Connaughton told a group of road contractors in March that the state was going to have to “adjust” the gas tax to keep it as a viable source of revenue. As “adjust” does not mean “lower” in government-speak, Connaughton was promising the assorted tax consumers that he would push for a hike in the 2012 session.

Today we learn that the Secretary is still worried about VDOT’s fund balances, but he’s backing off of his call for a gas tax increase:

The former Prince William Board of County Supervisors chairman told a Prince William Chamber of Commerce lunch crowd at Old Hickory Golf Club on Wednesday that the state’s main goal is to plug a $400 to $500 million hole each year that could be devoted to capital projects but instead is funneled to pay for road upkeep.

However, other than speaking to the possibility of public-private partnerships, Connaughton did not provide any details on how to stop this trend. He also reiterated Gov. Bob McDonnell’s opposition to raising the gasoline tax in a one-on-one interview with the News & Messenger.

It would seem that Connaughton’s freelancing days on the gas tax are over — not only because of the Governor’s stance against general tax increases, but more importantly, because of McDonnell’s possible vice-presidential ambitions (what would John Nance Garner have to say about that?).

This still leaves open the question of how the state intends to raise the monies it thinks it needs for new construction. Rest area advertising is mentioned as a possibility. It’s a fine idea, but hardly likely to pump $500 million a year into the state’s road building account.

Connaughton talks of public-private partnerships. Those are fine things, too, and Virginia should pursue those whenever possible. But even these don’t begin to close the construction gap.

But a “menu of potential options” needs to go much further. Some appetizers Connaughton might like to add include:

* Ensuring that the General Assembly can no longer raid the transportation trust fund to pay for other government programs. Constitutional amendments to put the fund off limits have been introduced, but have failed, because Democrats and Republicans can’t agree on the particulars of how it would all work.

* Overhauling VDOT. The current system is a Byrd machine relic that insists on the state having to maintain local roads. This isn’t just inefficient, it’s insane. Harry Byrd is dead. It’s time to put his road agency in the urn along with him and replace it with one that puts the responsibility for local roads in local hands.

* Stop using gas tax money to pay for mass transit. This is a wealth transfer, plain and simple. Worse, it breaks the implicit contract between the drivers and the government that their gas taxes will be used to maintain roads. It’s time for transit to pay its own way and stop leeching off the guy stuck in traffic.

* Begin experimenting with the next tax regime – whether it’s a miles-driven tax, congestion fees, tolls or something else – that will replace the per-gallon tax. Higher fuel economy and inflation have seriously eroded the gas tax’s purchasing power.

It would be very helpful, too, if Connaughton would use his bully pulpit to advocate against federal meddling in state road construction (points on which Heritage Foundation transportation expert Ron Utt elaborated in our radio interview with him in June).

If Connaughton is really interested in a full menu of alternatives that can generate the cash and policy freedom he wants, I’ve got Ron’s number…

Forget FOREX, VRS’ problem is with active management

by Norm Leahy

The headline news is that Virginia and Florida are suing Bank of New York Mellon for “…cheat[ing] pension funds in those states by choosing improper prices for currency trades the bank processed for the funds.

But the real headline story that, so far, I’ve only seen posted here, is how Virginia’s public employee retirement system is paying handsomely — with retirees’ money — for investing in actively managed funds:

The Virginia Retirement System, or VRS, pays millions to Wall Street, as well as highly-paid internal managers, to oversee its $55 billion fund. The state paid $125 million more to fund managers in 2010 than it did in 2005, when the system first embraced a “more active” investment strategy. The strategy yielded results in 2011, as the fund grew nearly 20 percent, still $3.4 billion short of its pre-recession high.

The fund needs a 49 percent gain to make up for recession losses.

“The reason the fees are so high is because 89 to 90 percent of our investments are under active management,” VRS Director Bob Schultze said. “We have to go to outside firms that put out all of these results.”

This feeds into an old debate: whether actively-managed funds perform better over the long term than index funds:

The VRS could achieve similar long-term investment gains with an index fund, a computer generated investment scheme designed to react to market trends, according to Andrew Biggs, a retirement scholar at the conservative American Enterprise Institute.

“The whole point of active management is to try and outsmart the market,” he said. “But 75 percent of the time, active managers don’t beat the index funds. You can’t outsmart the market.”

Some large index funds have been able to churn out results similar to the system’s performance.

I remember having a long-running argument argument with the retirement fund managers at a former employer. They weren’t keen on index funds, preferring to stick with actively-managed funds that carried higher fees.

So I asked for information on the active funds’ holdings. When that data was provided, it was not surprising to find that funds which, by their names alone, would seem to have vastly different investment goals also tended to own shares in the same companies. But we could only see what the top ten holdings were — in the past. A complete list of current holdings was unavailable, nevermind how long those holdings had been in the portfolio. And tax considerations? Fuggedaboutit.

So what did active management provide? The promise of greater returns, but rarely greater than the index used as a benchmark. And at a far higher price, with less diversity, than those same benchmark index funds. But the idea that smart people were watching the market like a hawk every day, as opposed to a dumb index that just sat there, gave some of my colleagues great comfort.

It’s the same with the VRS. The state’s retirement plan took a huge hit coming out of the 2008-2009 market swoon. They turned to active management to try to cover the losses because they believed the smartest guys in the room would give them an edge. But that move has cost them a great deal — arguably, far more than the monies in question in the suit pending against Bank of New York Mellon.

So why does the VRS stick with active managers that cost a heckuva lot more? Sen. Roscoe Reynolds offers the classic response:

“If something went wrong, could you imagine the response from the public if we were relying on a computer? I can tell you it wouldn’t be good.”

Is SkyNet running the Russell 2000? Or the Wilshire 5000? Not yet. But there’s also no indication that the bright minds behind active investment strategies — and the costs they bring — do any better than the far cheaper, and in many ways far smarter, index approach.

With Warner snub, “super committee” shows it’s hardly super

Senator Mark Warner had some small hope of being named to the congressional “super committee” that is supposed to pore over the federal budget and find hundreds of billions of dollars worth of additional savings (or taxes increases, or both) in order to avoid across the board cuts. Those automatic cuts would result in a $600 billion hit to defense spending which could throttle Virginia’s defense-spending dependent economy.

Before Senate Majority Leader Harry Reid made his “super committee” picks, Warner characterized his chances of being picked, and the committee’s likely Democratic make-up, this way:

…he doesn’t see much chance of winning one of the three Senate Democratic seats — because he wants to tackle entitlement reform and tax reform on a much broader scope than is envisioned by the new committee.

“The fact that I’m willing to do that probably means that I’m not actually going to get on the committee,” Warner said on Fox News. “I don’t actually expect to get on the committee. … I also know that chances are that there will be enormous pressure on leadership in both parties to put members that might not be willing to be as bold.”

As Ken Falkenstein notes, Mr.Warner was passed-over for membership on the committee in favor of the odious John Kerry, Democratic Senate campaign chair Patty Murray and Finance committee chair Max Baucus.

So give Warner the credit he’s due: he knew Reid would pick those who weren’t interested in sweeping entitlement reform. If anything, the Murray choice ensures just the opposite. In addition to her charge to look after Democrats’ electoral concerns, according to the Wall Street Journal, Murray is also “a vocal supporter of Social Security and Medicare.”

In that same Journal article, we learn more about why Warner was shut out of the committee — his involvement with the “Gang of Six” — and Harry Reid’s take on entitlements:

That group irked Mr. Reid by going its own way and trying to influence matters during the recent negotiations on the debt ceiling. In addition, those senators accepted cuts to Social Security at a time when Mr. Reid was strongly rejecting such cuts.

Hope, change…not on his watch.

It’s anyone’s guess who will be named to the other spots on the “super committee,” but the snubbing of Mark Warner has made a few things clear:

* Serious entitlement reform is off the table for Democrats.

* This and taxes will likely lead to no agreement, meaning the automatic cuts of the debt ceiling could be on their way. Buckle-up, Virginia, it’s about to get bumpy.

* Warner has been given an additional reason not to make the Senate a long-term career. Terry McAuliffe, you’d best call your office.

Downgrades, finger pointing and irrational voters

by Norm Leahy

There has been and will be a great deal of finger pointing in the wake of the S&P downgrade of the federal government’s debt. But there’s an old saying, or maybe it was just a Dire Straits lyric — when you point your finger ’cause your plan fell through, you got three more fingers pointin’ back at you. That applies quite nicely to the debt debate.

Republicans who scream that it’s all the Democrats fault for spending like mad hatters ignore or explain-away the spending excesses of the Bush years. Democrats who wail and gnash their teeth at Republicans who refused to raise taxes forget that under their watch, federal deficits and debt have piled up far faster than they did during the entire Bush tenure.

This back-and-forth, as cathartic as it is for some, solves nothing. The debt deal that managed to pass congress was their best effort — and the markets and ratings agencies have said it wasn’t good enough. But it was all that could have been expected given the political divide in government, some will charge. Perhaps. But what is the source of that divide?

You and me. Or at least the you and me who vote. We put people in power who do what we want them to do, whether it’s fight like crazed bobcats against taxes or mount furious charges to expand the size of government. There are precious few Edmund Burkes in Washington, voting their consciences and beliefs over the needs and wants of their constituents. What we are left with, then, are reflections of ourselves. And its not a pretty sight.

Back in 2007, I wrote a piece for the old Bacon’s Rebellion e-zine about irrational voters, a concept George Mason University Prof. Bryan Caplan advanced in his book of the same name. He discussed how our inherent biases lead us to believe things that simply aren’t true. and when we take those biases into the voting booth, “…socially injurious policies win by popular demand.”

Sift through the stinking mass that is the federal debt, and you’ll find receipts for all sorts of ill-considered ideas, policies and programs. And each of them was put there because we, through our representatives, demanded it.

Tax holidays are the (political) gift that keeps on giving

It’s sales tax holiday time, again, in Virginia. Yes, it’s a special time of year when the state generously lifts its sales tax on certain items, in this case, school supplies, to encourage consumers to get out there and spend.

I’ve written more times than I care to recall about how such holidays are poor policy. But this item in the Fredericksburg paper so neatly captures the muddled thinking behind the holidays, it demands a response. The nut graph runs like this:

The idea of a sales-tax holiday for back-to-school shopping began in New York 15 years ago. And what a boon it is for parents! The days of sending kids back to school with a new lunchbox and a couple of sharpened pencils are long gone. Today’s parents shop from lists that include everything from folders, packs of notebook paper, and boxes of crayons, pens, and pencils to hand sanitizer and tissues. The average consumer spends over $600 outfitting their kids for school, according to the National Retail Federation’s Back-to-School survey. That’s daunting for many families. So 13 states, including Virginia, now help by relaxing retail sales tax rules for a few days.

Unpacking the inanities in this paragraph is difficult. But I’ll focus on the rare use of an exclamation mark in the piece.

Is the back-to-school sales tax holiday a genuine “boon” for parents? Hardly. What the sales tax holiday implies is that the list of supplies required and suggested for returning students has gotten out of hand. I’ve seen the list from my son’s school. It borders on the ridiculous, and includes a list not only of personal supplies, but “shared use” items (all-purpose cleaner? Really?).

But sales tax holidays are also an admission that the state’s overall sales tax is out of whack. As the Tax Foundation has long noted, and does so again here :

Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. If a state must offer a “holiday” from its tax system, it is a sign that the state’s tax system is uncompetitive. If policymakers want to save money for consumers, then they should cut the sales tax rate year-round.

Exactly. But don’t look for the resident political class to provide such year-round relief any time soon. Providing tax relief to everyone, every day, on every item they purchase, offers only one unique opportunity to issue a self-congratulatory press release. Virginia pols, with three, regularly-scheduled tax holidays, have created the political gift that keeps on giving.

Ron Paul wants to cancel $1.6 trillion in debt

More specifically, the Texas congressman and GOP presidential hopeful has introduced legislation that would cancel the $1.6 trillion in Treasury debt held by the Federal Reserve:

Paul has argued for the last few weeks that the idea represents a quick way to make the growing fiscal crisis more manageable. Under his bill, H.R. 2768, the $1.6 trillion that the Treasury owes to the Federal Reserve would disappear.

The Federal Reserve began buying Treasury bonds in earnest late last year as part of its effort to keep long-term interest rates down. But Paul has argued that Fed purchases of Treasury debt represent a debt that the government owes to itself, and one that also leads to an unwanted and inflationary increase in the money supply.

Paul has also said the Fed is allowing the federal government to continue a spending binge it otherwise would not be able to afford, and is forcing the Fed to print money to keep up.

The Fed carries Treasury notes on its books as assets that it could turn around and sell at some future point. How the bond market would react to such a move isn’t clear to me — one could argue that cancelling debt like this could be read as making the U.S. government an enormous credit risk. That would give the bond vigilantes a fat target (and hold on to your shorts if they get started…they may be all you have left once the posse has left town). And as for our overseas lenders…well. They wouldn’t take such a move lightly, would they?

There’s a degree of logic to Paul’s move in that what the Federal Reserve has been doing is monetizing the nation’s debt, which is just another word for default. Cancelling the debt, then, would be like ripping the bandage off a wound: it’ll hurt like hell, but airing-out that wound will help it heal. But how well a patient can heal when reduced to a diet of gruel and sand is unclear…

And while we’re considering cancelling debts the government owes to itself, how about those IOUs in the Social Security Trust Fund? During the depths of the debt ceiling tussle, the President as much as admitted that the Trust Fund is neither trustworthy nor funded. Using Dr. Paul’s formula, cancelling that debt might also force the government to end the Ponzi scheme (so long as we first pass legislation requiring all seniors, and not a few bankers, foreign and domestic, to be disarmed or, better yet, jailed).

The possibilities are as endless as the consequences.

Which is why this bill isn’t likely to go anywhere, except into a list of Paul talking points and campaign brochures.

(Cross-posted at Score Radio Network)

Another victory like this and we are undone

The great debt deal, which will save the Republic from… something… increasingly resembles a sad joke. Your morning chart, courtesy of Tad DeHaven, offers a sobering look at what the political class and its pilot fish consider a win on spending:

Somewhere, Pyrrhus of Epirus is smiling.

Now here’s another chart to ponder: It plots the price of gold versus hikes in the federal debt ceiling limit since 1994:

There are any number of reasons why gold has risen over the last 17 years — wars, uncertainty, demand, etc. The barbaric relic’s rise, though, does seem to fit neatly with the debt ceiling’s rise. Notice the long, flat period during the late 1990s for both gold and the debt? Those were the salad days, when the feds were running near or in the black. Not surprisingly, those were also the days of divided government, hyper-partisanship and the Clinton impeachment. And a tech bubble.

Oh, how could you have gone so wrong?

It all falls apart during the Bush years, particularly in his second term, and becomes almost parabolic during the Obama years… which also coincide with the fed’s furious currency debasement.

Is it all a coincidence? Possibly. But this is the sort of chart that should make you wonder just how long the era of fiat currencies will last. Coupled with the first graph, it makes me wonder if that moment has already arrived.

(Cross-posted at Score Radio Network)

A deal only a politician could love

by Norm Leahy

The news readers on the financial networks this morning were almost giddy. The political class has reached a debt ceiling deal! The futures are up! Now we can get back to the serious business of letting fund managers talk their books!

This mindless cheerleading will go on for most of the day, or at least until the closing bell. But for those of us who look upon almost anything that oozes out of DC with contempt, there are a few hard facts to know about this “deal.” Fortunately, Cato’s Chris Edwards, again, does the dirty but essential work:

Spending isn’t being cut at all. The “cuts” in the deal are only cuts from the CBO “baseline,” which is a Washington construct of ever-rising spending. And even these “cuts” from the baseline include $156 billion of interest savings, which are imaginary because the underlying cuts are imaginary.

No program or agency terminations are identified in the deal. None of the vast armada of federal subsidies are targeted for elimination. Old folks will continue to gorge themselves on inflated benefits paid for by young families and future generations. None of Senator Tom Coburn’s or Senator Rand Paul’s specific cuts were included.

The federal government will still run a deficit of $1 trillion next year. This deal will “cut” the 2012 budget of $3.6 trillion by just $22 billion, or less than 1 percent.

There are those, including many folks I respect, who will call even such lilliputian cuts as these a victory. And they have something of a point: for the last decade, the political class has cut nothing, so even the most modest of cuts, even if they are chained to the ever-rising baseline budget, are at least rhetorically significant. And even more, these pin-pricks have been achieved despite a Democrat-controlled Senate and a Democratic President, both of which were counting on, and campaigning for, higher taxes as part of any deal.

Fair enough.

But there’s an old, colorful saying: “Don’t piss on my boots and tell me it’s raining.” This deal is not a solution. Entitlements, war spending, even grants for cowboy poets…they will continue unabated. And far sooner than almost anyone is willing to admit, the bills will come due and the shambling fiscal wreck that is the United States will find itself unable to pay.

Over the weekend on “The Score” radio show, Jim Bacon and I discussed the debt ceiling follies and what might really be required to set the nation on a sound fiscal course. You can listen to that wonky goodness here.