The Real Dysfunction: A $17 Trillion National Debt

Gentlemen may cry default, default, but there will be no default. (With apologies to Patrick Henry.)

Once again the media are full of talk about dysfunction and default, as the partial government shutdown threatens to linger until the federal government hits the limit of its borrowing capacity, possibly on Oct. 17. The parties in Congress are still far apart on passing a budget bill to keep the government running, and Republicans are also promising not to raise the debt ceiling without some spending reforms.

If in fact Congress doesn’t raise the ceiling by mid-October—or by November 1 or so, when the real crunch might come—then the federal government would be forbidden to borrow any more money beyond the legal limit of $16.699 trillion. But it would still have enough money to pay its creditors as bonds come due. The government will take in something like $225 billion in October, but it wants to spend about $108 billion more than that. You see the problem. If it can’t borrow that $108 billion—to cover its bills for one month—then it will have to delay some checks. 

Now the U.S. Treasury isn’t full of stupid people. Back in 2011, when the debt ceiling of $14.3 trillion was about to be reached, the Washington Post reported:

The Treasury has already decided to save enough cash to cover $29 billion in interest to bondholders, a bill that comes due Aug. 15, according to people familiar with the matter.

You can bet they’re making similar plans today.

Back in that summer of discontent I talked to a journalist who was very concerned about the “dysfunction” in Washington. So am I. But I told her then what’s still true today: that the real problem is not the dysfunctional process that’s getting all the headlines, but the dysfunctional substance of governance. Congress and the president will work out the debt ceiling issue, if not by October 17 then a few days later. The real dysfunction is a federal budget that doubled in 10 years, unprecedented deficits as far as the eye can see, and a national debt bursting through its statutory limit of $16.699 trillion and heading toward 100 percent of GDP.

We’ve become so used to these unfathomable levels of deficits and debt—and to the once-rare concept of trillions of dollars—that we forget how new all this debt is. In 1981, after 190 years of federal spending, the national debt was “only” $1 trillion. Now, just 33 years later, it’s headed past $17 trillion. Traditionally, the national debt as a percentage of GDP rose during major wars and the Great Depression. But there’s been no major war or depression in the past 33 years; we’ve just run up $16 trillion more in spending than the country was willing to pay for. That’s why our debt as a percentage of GDP is now higher than at any point except World War II. Here’s a graphic representation of the real dysfunction in Washington:

National Debt

Those are the kind of numbers that caused the Tea Party movement and the Republican victories of 2010. And many Tea Partiers continue to remind their representatives that they were sent to Washington to fix this problem. That’s why there’s a real argument over raising the debt ceiling. It’s going to get raised, but many of the younger Republicans are determined to set a new course for federal spending in the same bill that authorizes another yet more profligate borrowing.

And where did all this debt come from? As the Tea Partiers know, it came from the rapid increase in federal spending over the past decade: 

Federal Spending 2000-2011

Annual federal spending rose by a trillion dollars when Republicans controlled the government from 2001 to 2007. It rose another trillion during the Bush-Obama response to the financial crisis. So spending every year is now twice what it was when Bill Clinton left office a dozen years ago, and the national debt is almost three times as high.

Republicans and Democrats alike should be able to find wasteful, extravagant, and unnecessary programs to cut back or eliminate. And yet many voters, especially Tea Partiers, know that both parties have been responsible for the increased spending. Most Republicans, including today’s House leaders, voted for the No Child Left Behind Act, the Iraq war, the prescription drug entitlement, and the TARP bailout during the Bush years. That’s why fiscal conservatives have become very skeptical of bills that promise to cut spending some day—not this year, not next year, but swear to God some time in the next ten years. As the White Queen said to Alice, “Jam to-morrow and jam yesterday—but never jam to-day.” Cuts tomorrow and cuts in the out-years—but never cuts today.

If the “dysfunctional” fight that has sent the establishment into hysterics finally results in some constraint on out-of-control spending, then it will have been well worth all the hand-wringing headlines. The problem is not a temporary mess on Capitol Hill and not a mythical default, it’s spending, deficits, and debt.

Posted on October 7, 2013  Posted to Cato@Liberty

David Boaz discusses the wealth of Washington on FBN’s Stossel

Posted on October 4, 2013  Posted to Cato@Liberty

The Federal Government Is Not the Country

Rep. David Scott (D-Ga.) tells Republicans:

If you loved this country, you would not be closing it down.

Congressman Scott is confused. The federal government is not the country. The country is not shut down. Indeed, not only is the country going about its business, it’s barely noticing the government shutdown, which is barely even a government shutdown.

One might say, “If you loved this country, you would not be imposing further government control over health care, or busting the caps in a federal budget that doubled in a decade.” But those are topics for another day.

Posted on October 3, 2013  Posted to Cato@Liberty

Politicians and Their Friends

The Sunday Washington Post has a lengthy story on Terry McAuliffe’s highly successful “business” career. McAuliffe, of course, is the longtime Democratic fundraiser and “first friendof Bill Clinton who is now the Democratic nominee for governor of Virginia.

How did a lifelong political operative make many millions for himself? The Post reviews:

The pitches to potential investors in a new electric-car company have been unabashed about its promise: It will enjoy “billions” in government subsidies and tax credits, will rise to a dominant position in the U.S. electric-car industry and, perhaps most critically, has a politically connected founder with the savvy to make it all happen….

The prospectus, along with other documents reviewed by The Post, shows how GreenTech fits into a pattern of investments in which McAuliffe has used government programs, political connections and access to wealthy investors of both parties in pursuit of big profits for himself.

That formula has made McAuliffe a millionaire many times over, paving the way for a long list of business ventures, including his law firm, from which he resigned in the 1990s after profiting — along with his partners — from fees paid by domestic and foreign clients seeking results from the federal government.

A review of McAuliffe’s business history shows him often coming out ahead personally, even if some investments fail or become embroiled in controversy.

Or as McAuliffe told the New York Times:

”I’ve met all of my business contacts through politics. It’s all interrelated,” he said. When he meets a new business contact, he went on, ”then I raise money from them.”

And how did Bill Clinton meet his very good friend? Was it in high school? College? At Oxford? The local Kiwanis Club? No, President Clinton was down in the dumps after his electoral thumping in 1994 and needed to get in gear for his reelection campaign. Harold Ickes, “his politically astute deputy chief of staff,” urged him to meet McAuliffe, who had been a fundraiser for President Carter, when he was 23 years old, and Dick Gephardt. McAuliffe quickly recommended renting out the Lincoln Bedroom, and that worked so well that they became fast friends, maybe even “best friends.”

For more on how to make big money by being a friend of Bill Clinton, see the current cover story in the New Republic.

Meanwhile, McAuliffe is seeking the job currently held by Gov. Robert McDonnell, who is currently under fire for accepting many expensive gifts from a businessman seeking to do business with the state. The gifts were lavish – $15,000 to pay for catering for the governor’s daughter’s wedding, $15,000 to take the first lady shopping at Bergdorf Goodman in New York, use of a vacation cabin, use of a Ferrari, a Rolex watch for the first lady to give the governor, and some $120,000 in loans to a business McDonnell ran – but perhaps the sort of thing old friends do for one another. How old was the friendship? The high school soccer team, maybe? Church? No, McDonnell met his “family friend” as he was gearing up to run for governor in 2009. And as Jonnie Williams contributed more than $100,000 to his campaign, McDonnell quickly came to consider him a “personal friend.” No more, though, after the details of their friendship hit the newspapers.

Ah, friendship, it’s a beautiful thing. As Yeats wrote, “say my glory was I had such friends.”

And then consider the case of General Joseph F. Fil Jr., the former commander of the U.S. Eighth Army in South Korea, ­who was found by the Pentagon’s inspector general to have ­improperly accepted gold-plated Montblanc pens, a $2,000 leather briefcase and other gifts from a South Korean citizen while commanding U.S. troops in that country. His explanation? You guessed it:

Fil told investigators that he accepted the gifts in “good conscience,” believing that they were legal because the giver was a longtime personal friend. 

Awkwardly, though, 

Investigators cast doubt on that explanation, however, noting that the South Korean did not speak English and that Fil had to communicate with him by “using hand and arm signals.”

Of course, as the Dominican brother Innocent Smith has written, “One of the signs of a true friendship is that friends can be silent together without awkwardness.”

Seriously, though, we could consider all these politicians and generals hypocrites: They call people “friends” who are useful to their pursuit of power and money. But we might also feel sad for them. The people they call friends, “personal friend,” “family friend,” even “best friend,” are trading money for access, and access for money. Some might view it as more of a symbiotic relationship than actual friendship.

Perhaps the term they should use is “crony,” which interestingly enough is defined by Merriam-Webster as

a close friend of someone; especially : a friend of someone powerful (such as a politician) who is unfairly given special treatment or favors

So there you have it: a crony actually is a close friend. Who seeks and receives favors. 

And all of this is a far cry from actual businesspeople, who create wealth by discovering and serving the needs of other people. Sam Walton, Bill Gates, Fred Smith, and your corner deli owner are businesspeople. Terry McAuliffe and other political operatives who trade on their political connections to get cut in on sweetheart deals and government subsidies are something else again.

Posted on September 23, 2013  Posted to Cato@Liberty

Sorry about the Recession, America, But Don’t Worry about Washington

The Census Bureau reports, says a Wall Street Journal article, that between 2000 and 2012 “median household incomes for the nation as a whole dropped 6.6% — from $55,030 to $51,371.” There’s reason to doubt that real incomes are actually down over such a long period. But growth is certainly slow.

Except in Washington. The Journal notes:

The income of the typical D.C. household rose 23.3% between 2000 and 2012 to an inflation-adjusted $66,583, according to the Census Bureau’s American Community Survey, its most comprehensive snapshot of America’s demographic, social and economic trends. …

The Washington, D.C. metro area — which includes the surrounding suburbs in Maryland, Virginia and West Virginia — has it even better, with a median household income of $88,233 that ranks highest among the U.S.’s 25 most populous metro areas. Tampa, Florida’s median income, by contrast, is under $45,000….

[Washington’s]  local economy is expanding faster than the broader nation, and its property market is soaring, thanks in part to increased federal-government spending and an influx of federal contractors, lawyers and consultants.

As we’ve written here many times, a rising tide of government spending may be bad for the American economy, but it’s great for the Washington area.

Washington is wealthy and getting wealthier, despite history’s slowest recovery in most of the country. As we’ve said here before, this of course reflects partly the high level of federal pay, as Chris Edwards and Tad DeHaven have been detailing. And it also reflects the boom in lobbying as government comes to claim and redistribute more of the wealth produced in all those other metropolitan areas. 

Money spent in Washington is taken from the people who produced it all over America. Washington produces little real value on its own. National defense and courts are essential to our freedom and prosperity, but that’s a small part of what the federal government does these days. Most federal activity involves taking money from some people, giving it to others and keeping a big chunk as a transaction fee.

Every business and interest group in society has an office in Washington devoted to getting some of the $3.6 trillion federal budget for itself: senior citizens, farmers, veterans, teachers, social workers, oil companies, labor unions - you name it. The massive spending increases of the Bush-Obama years have created a lot of well-off people in Washington. New regulatory burdens, notably from Obamacare, are also generating jobs in the lobbying and regulatory compliance business.

Walk down K Street, the heart of Washington’s lobbying industry, and look at the directory in any office building. They’re full of lobbyists and associations that are in Washington, for one reason: because, as Willie Sutton said about why he robbed banks, “That’s where the money is.”

Posted on September 22, 2013  Posted to Cato@Liberty

The Fight against Low-Wage Work

The Washington Post reports on its front page today:

Mayor Vincent C. Gray vetoed legislation Thursday that would force the District’s largest retailers to pay their workers significantly more, choosing the potential for jobs and development at home over joining a national fight against low-wage work.

That last is an interesting phrase: a national fight against low-wage work.

When laws like this are passed, there is indeed less low-wage work. As Robert J. Samuelson writes:

In the short run, even sizable increases in mandated wages may have moderate effects on employment, because businesses won’t abandon their investments in existing operations. But companies that think themselves condemned to losses or meager profits won’t expand. Not surprisingly, a study by two economists at Texas A&M finds that the minimum wage’s biggest adverse effects are on future job growth, not current employment.

In the case of the District’s proposed law, we won’t have to wait for future effects. The target of the legislation, Wal-Mart, is about to open six stores in the District of Columbia, where the unemployment rate is 8.5 percent. But the company says it won’t open three of those stores if it is forced to pay a minimum wage 50 percent higher than other retailers.

Minimum wage and “living wage” laws can reduce employment in several ways. Jobs may be eliminated—ask your father about the guys who used to pump your gas for you, or your grandfather about movie ushers, or notice how groceries and drug stores are eliminating cashiers. Firms may hire a few high-skilled, high-productivity workers rather than many low-skilled, low-productivity workers. They may shift from labor to technology.

With total U.S. employment still lower than it was in 2007, we should stop the fight against low-wage work. Many Americans would rather have low-wage work than no work at all.

Posted on September 13, 2013  Posted to Cato@Liberty

David Boaz discusses the situation in Syria on Reason TV

Posted on September 6, 2013  Posted to Cato@Liberty

Politics and Politicians

The New York Times, which wants politicians to run everything from our schools to our health care to our retirement, has lately been telling us just what kind of people it wants us to trust with our lives. People like mayoral candidate Bill Thompson:

As a first-time candidate for New York City comptroller, William C. Thompson Jr. was feted at a downtown fund-raiser in 2001 by two luminaries of the black business world: the hip-hop mogul Russell Simmons and Mr. Simmons’s money manager, a veteran Wall Street financier who made his fortune promoting hybrid securities known as convertible bonds.

Speaking in between rap and poetry-slam performances, the financier, Tracy V. Maitland, made clear why he had taken an interest in the little-watched race for comptroller. “When you control $85 billion,” he told 200 guests crowded into a popular art gallery, “you get a lot of attention.”

Over the last 12 years, Mr. Thompson has repeatedly gotten Mr. Maitland’s attention.

After that fund-raiser, Mr. Maitland became a regular contributor to the campaigns of Mr. Thompson, a Democrat who is now running for mayor. Later, he pushed unsuccessfully for Mr. Thompson’s wife to be hired as president of the American Society for the Prevention of Cruelty to Animals, where he is a trustee.

Mr. Maitland’s attention was not unrequited. In 2006, Mr. Thompson honored him at a Black History Month observance. And in 2008, his office for the first time began investing city pension assets in convertible bonds, pouring $324 million into Advent Capital Management, the firm Mr. Maitland founded. By the time Mr. Thompson left office, in 2009, Advent was earning $2 million a year in fees on those investments.

Mr. Thompson’s ties to Mr. Maitland reflect a pattern that emerges from an examination of Mr. Thompson’s stewardship of the pension funds and, more broadly, the comptroller’s office: Again and again, Mr. Thompson reaped political gains from those he awarded city business.

As he oversaw the city’s $85 billion pension system, Mr. Thompson steered the funds into a diverse range of new investment categories, expanding from heavy concentrations in stocks and bonds into private equity, real estate and niche funds. Yet performance was lackluster: nationwide, more than half of large public pension funds outperformed the five city funds’ combined 4.84 percent return from 2002 through 2009, according to a widely used yardstick compiled by Wilshire Associates, an investment advisory firm. Meanwhile, the city’s roster of fund managers, and their fees, tripled — and Mr. Thompson collected more than $500,000 in campaign donations from them.

Mr. Thompson’s credentials as comptroller and a seasoned manager are central to his mayoral campaign, in which he has portrayed himself as the grown-up in the Democratic field — less liberal, strident and showy, but best prepared for the sober task of managing an unruly city.

But interviews and a review of thousands of pages of records — schedules, e-mails, pension statements and campaign finance reports — suggest frequent overlap of Mr. Thompson’s political ambitions and the comptroller’s operation, and that like many pension overseers at the time, he raised campaign money aggressively from those seeking business from his office.

And his opponent Bill DeBlasio:

The anxious executive cornered Bill de Blasio in an elevator, with an urgent plea.

New York City was planning to allow thousands of new taxis to operate outside Manhattan, directly threatening his car and limousine business. Would Mr. de Blasio, the city’s public advocate, help block it?

It was hard to imagine Mr. de Blasio, a Brooklynite who built his reputation on standing up for the boroughs beyond Manhattan, opposing a proposal to improve transportation for his chronically taxi-starved neighbors.

But soon after the elevator encounter that day in 2011, the car service executive, Avik Kabessa, heard back from the public advocate’s office.

The message, Mr. Kabessa recalled, was clear: “Bill is looking to help.”

Mr. de Blasio would emerge as the taxi plan’s most prominent opponent, leading sidewalk rallies and using his office to fight it in court — and confounding allies who found his stance incongruous with his typical stands.

“I was flabbergasted,” said David S. Yassky, the taxi and limousine commissioner whose former City Council district borders Mr. de Blasio’s. “After hearing all his rhetoric about standing up for the outer boroughs, here’s a program that actually would help 80 percent of New York City, and he did everything he could to stop it.” 

The powerful taxi and limousine industry, which bitterly opposed the city’s plan, made its gratitude clear, sending about $200,000 in contributions to Mr. de Blasio’s mayoral campaign in the last two years, far more than his rivals received. And Mr. Kabessa, the chief executive of Carmel Car and Limousine Service, now sits on the campaign’s finance committee and was a host of a fund-raiser for Mr. de Blasio this spring.

And two years ago, this story on the Times-endorsed candidate, Christine Quinn:

To drive down Kings Highway in East Flatbush is to pass block after block of near-identical brick homes, neat gardens, statuary and ironwork.

Yet if you live on the road’s north side, in Councilman Jumaane D. Williams’s district, the leader of the City Council allocates about $2.50 per resident each year in discretionary spending. If you live on the south side, in Councilman Lewis A. Fidler’s district, the leader showers about four times as much on you, or $10 per resident.

These are tiny piles of cash in a $66 billion New York City budget. But working-class immigrant neighborhoods like these in Brooklyn suffer many afflictions: shabby buildings, drug dealing, too many young men with guns and too few with jobs.

Every dollar counts.

And politics seems to account for the difference. Mr. Fidler is allied with Christine C. Quinn, the Council speaker. Mr. Williams is aligned with those who often annoy her….

She wields money as a cudgel, and — like past speakers — tolerates dissent best when expressed behind closed doors. 

And then there’s Gov. Andrew Cuomo:

[A]n investigation by The New York Times into hiring by the agency, the Empire State Development Corporation, shows how Mr. Cuomo’s administration has engaged in some of the same patronage practices that have often prevailed here….

While some of the new employees at Empire State had experience in economic development, others did not. Some of the jobs were not open to competition, and were filled with little input from the agency itself.

Empire State has also hired friends of Mr. Cuomo who may help form his political brain trust should he decide to run for president in 2016.

James P. Rubin, a former State Department spokesman, was hired at the agency in 2011 as counselor on competitiveness and international affairs, with a salary of $150,000 a year. Mr. Rubin’s appointment was seen by political consultants as a move by Mr. Cuomo to add a foreign policy hand to his stable.

Empire State hired 49 people in the first 20 months of the Cuomo administration, according to personnel records obtained by The Times. Nearly a third were the governor’s political associates, donors and friends, or their relatives, the records and interviews show.

When you want to put politicians in charge of our hard-earned money and other aspects of our lives, you shouldn’t be surprised when patronage, corruption, and favoritism rule. This is the business you have chosen.

Posted on September 3, 2013  Posted to Cato@Liberty

The Good Book and the Not-So-Good Books

An illuminating way to measure the vastness of government regulations:

Another way to measure the government’s size is by the length of its rule book, the Code of Federal Regulations. It is now as long as 95 King James Bibles….

In all, the Code of Federal Regulations has grown by 16,500 pages under Obama. Nine Bibles.

Posted on August 26, 2013  Posted to Cato@Liberty

Concentrated Benefits and Diffuse Costs, Local Airports Edition

Rep. Tom McClintock tells David Fahrenthold of the Washington Post what economists mean by “concentrated benefits and diffuse costs”:

This Congress has also indulged in the habit of letting “temporary” giveaways become effectively permanent. A prime example is the Essential Air Service, a $240 million program that subsidizes flights to 161 small airports.

It was supposed to die in 1988. It didn’t.

Congress has renewed the program, again and again. Now it subsidizes flights to places such as tiny Glendive, Mont., where the government pays for a 19-seat aircraft to visit twice a day.

On average, two people get on each day. The subsidy works out to $836 for each of their tickets.

“If we can’t cut this, we can’t cut anything,” said Rep. Tom McClintock (R-Calif.), who sponsored an attempt to kill the program last summer.

They can’t cut this.

McClintock’s amendment lost by 74 votes. Then he tried again this summer. And lost. Many members explained their “no” votes by saying they were unwilling to sacrifice the subsidies to airports in their districts. “It’s that old problem of concentrated benefits with diffuse costs. The benefits are lavished on a few select communities, and the costs are diffused across the entire tax base,” McClintock said afterward. The beneficiaries, he said, are the only ones who care enough to fight.

Posted on August 25, 2013  Posted to Cato@Liberty

About David Boaz

Click here to learn more.

Commentator

Search