Wednesday, December 21, 2011 - Congressional Lump of Coal

Merry Christmas, Happy Hanukkah and A Happy New Year! I usually end my final missive of the year with these wishes. But, since the rest of this e-mail is loaded with lumps of coal, I thought I would start out with the happier note! Now, on to details that could just as easily have been provided by Ebenezer Scrooge.

Post-Thanksgiving, there were basically two issues remaining for Congress this year. I will address each separately:

Funding the Government: A bill to fund the government for the balance of this fiscal year passed both Houses on a bipartisan vote and is expected to be signed by the President very soon. The total spending in this bill was determined by the "debt limit agreement" in August. So, all that had to be worked out were the specifics within that number ($1.043 trillion). So, that means no government shutdowns before September 30, 2012. Additionally, it is standard practice in election years to fund the government from October 1st through at least the end of November on a Continuing Resolution (CR) rather than try to get enormous spending bills done weeks before an election. So, I expect that next year in March or April, the House will pass an updated version of the Paul Ryan budget that was passed this year. The Senate will continue accruing its record number of days gone by without even proposing, not to mention passing, a budget. If the Senate has offered no budget by early next year, then that will be somewhere north of 1300 days since they last passed a budget, or enough time for Kim Kardashian to get married and divorced 18 times. If that is the case, there will be a CR passed in late September to cover the rest of the year. The bad news about all this is that there will be no opportunity to cut spending further and bring the budget closer to balance until 2013. The good news is that at least there will be no spending related drama in 2012. The only possible exception to this would be if a recession, collapse in Europe, or some act of Congress drives the deficit up over the next 10 months such that the current debt limit ($15.194 trillion) is hit before the election.

Social Security Taxes, Unemployment Insurance and Such: Here is the naked truth about all the recent consternation on Capitol Hill that you are not hearing from the mainstream media: Extending the Social Security Tax cut is a bad idea. It was a bad idea to do it in the first place. The Social Security system is already paying out more money than it is taking in, and this problem is projected to get progressively worse every year in the future. So, why would we make this insolvency worse by reducing what everyone pays in to the system? And, the extension adds $121 billion to the deficit. If you decided to do the extension and then reduced how much everyone gets in Social Security payments, that would be one thing. But, we are not doing that. We are just saying pay less and get more. Except that we will all pay much, much more or get much, much less when the deficit takes us the way of Greece soon. And, no reasonable economist from the right or the left believes that this sort of program stimulates the economy. It was done under the first President Bush, and once more since then, and neither instance worked to spur economic growth. This won't either.

The unemployment extension to 99 weeks is also a bad idea. There is now plenty of evidence that it actually encourages and rewards unemployment and makes people stay on unemployment longer, thereby keeping more people unemployed. Another problem with both the Republican and Democratic proposals on these "extenders" are the so-called "pay-fors". Both party’s bills "pay for" a one year extension (or two months) of new spending by raising taxes or cutting spending over 10 years! That's one year of spending paid for by 10 years of something else. That's like telling your grocer that you will pay him or her for today's groceries over the next 10 years....unless you change your mind. That's why the proposals by both parties increase this year's deficit by at least $167 billion.

The bottom line here is that these "extenders" are bad ideas that will not help the economy, will absolutely and dramatically increase the deficit, and will generally make it harder to fix our problems in the future. As you have probably guessed, I was one of 14 Republicans to vote against both the Republican and Democratic proposals on this and one of only 6 to vote against them last year and again this year.

Truth be known, my position is not as much as an outlier as it might seem. Many, if not most, people in both parties understand that this is bad policy. So, why the bipartisan love fest for a proposal that further endangers Social Security, increases deficits, and hurts the economy? It all gets back to the occupant of the White House. Obama is doing all he can to avoid running for reelection on his record or on what he might do if reelected. (By the way, have you ever heard him once voice what he would do with another 4 years? No, you haven't.) He doesn't want to have to talk about the economy or how he is making us more dependent on Middle East oil or how “Obamacare” is increasing medical costs or his rudderless foreign policy, which makes me almost long for Jimmy Carter again. So, rather than let the House and Senate engage in a reasonable discussion of how to ease us out of this unnecessary spending, he seized the political opportunity to call a non-extension of a one-year, self-described temporary, Social Security tax holiday, a Republican tax increase. Unfortunately, instead of pointing out that this cannot be extended without damaging the Social Security trust fund, my side of the aisle played along with the President's characterization. And now, we are where we are. With the exception of the oil pipeline approval, this debate has nothing to do with good public policy. It is all about posturing for the next election. Our President is very good at running for president. Unfortunately, he is not good at being president. I suspect that in the end these things will all be extended and there will be no "pay-fors", or there will be "pay-fors" that aren't real. This is how we have gotten into the fiscal mess we are in. When Republicans and Democrats both want to spend money, but spend it in different places, the "compromise" is to let everybody spend everything and only the deficit loses. Obama has already made this sort of deal several times. I'm sure he will make it again. But, at some point we have to stop this, or the outside world will force us to stop - as is now happening in Europe. I wish we could stop it here and now. All we have to do is actually do nothing, and the deficit will go down and the economy will take a tick up. Alas, maybe next year.

But, as I said, it is Christmastime. You will not receive another missive from me until next year. So, for a few days, forget about this junk. Enjoy your families, your friends, and your freedom. Thank God for the gifts he has brought us and continues to bring us that know no political labels. Perhaps place a knee to the ground in supplication to Him for His goodness and His grace. And, don't forget to raise a glass to toast the passing of 2011 and a hopefully brighter 2012.

Drive fast and live free........Ho, Ho Ho.

Tuesday, December 13, 2011 - Europe's Effect

Europe's Effect: Europe is a long ways away. It may seem like what happens there can't be of that much consequence to us in America. But, that's not true. Just as conflicts that ignited in Europe in the 20th century dragged us into two world wars, the effects of economic unrest on that continent will involve us, as well - whether we like it or not.

To coin a phrase, Europe is in economic deep doo-doo. They are suffering a huge crisis born of too much debt of which the causes and potential cures are far too complex for a meaningful analysis in this short format. Suffice it to say that Europeans have given themselves a lot of socialistic benefits without paying for them, instead choosing to borrow the money. The resulting union-dominated socialism has led to very little growth. Italy, for example, has had zero GDP growth in 10 years! Without GDP growth, you cannot grow wages, benefits, government, or social and environmental policy. But, they have tried to do all of that. Germany is the most prosperous country in Europe, but even their prosperity has not been pure. Note that 50% of all of Germany's products are exported; most to other European countries. The Euro has enabled weaker economies (Greece, Spain, Portugal, etc.) to purchase German goods with an artificially strong currency that they would not have had access to on their own. This has propped up the German economy beyond what it would have otherwise been.

But now, the economics of all this have hit a proverbial wall. From here, it is possible that the Euro will break up and each country will return to its old currencies. It is possible that some countries will leave the Euro. It is possible that the Germans and the French will bail out the weaker countries. And, there are any number of other scenarios. Although this is an economic problem, the solutions are necessarily political. For Germany to bail out Greece is akin to the United States establishing a TARP program for Mexican banks. Not an easy political lift. But, all the solutions are difficult politically. And, let's remember that these are separate nations with centuries of history that are hard to ignore or forget.

So, what does this all have to do with us? Europe is already in recession. Even if they get their act together, a recession experienced by our largest trading partner will reduce GDP growth in this country. So, their problems will be a drag on our economy even in the best case. But, if they fail to resolve their problems and one or more of their big banks fail in a disorganized manner, we could see a worldwide freezing of financial arteries similar to what caused the crash in 2008. Remember, that crash, which impacted every country, was triggered by the failure of a single American financial institution, Lehman Brothers. Now, before you jump out of the window, our financial institutions are much better prepared for this sort of thing than they were in 2008. And, we can see it coming this time, which was not the case then. But, the interconnectivity of the world's financial systems are such that a catastrophic failure in the world's second biggest economy will hit us, and the entire world, hard no matter how much we try to prepare.

I am concerned that the President is so preoccupied with running for reelection and scoring political points that we are not as prepared as we should be. This President has no idea how to run the country, but he is good at campaigning. And frankly, congressional leadership is all tied up trying to counter the President's continual campaigning. Therefore, I am working hard to make sure that the U.S. Treasury and the Federal Reserve, as well as congressional leadership, acutely understand the nature of the threat and prepare the US financial system against the possibility of failure in Europe. I am starting to engage with a lot of folks "in the trenches" and am making progress.

There is some good news here. Honest, there is.

We have problems in America. But, the rest of the world is in even worse shape. Europe's problems are clear. But, China recently cut their interest rates even though they have inflation because their growth is falling off. India and Brazil are struggling, as well. In fact, every other country on earth is hugely dependent on the actions of other countries - except the United States. We can create our own growth. We can cure our own fiscal problems. If we could get our fiscal and economic act together, capital, business and jobs would run here from all over the world. I began this tome talking about how European military conflicts drew us into becoming involved during the 20th century. As horrible as those conflicts were, America emerged from them stronger than before. We can do that again. We could begin a new era of growth and prosperity, propelled by our economic superiority rather than our military superiority.
 
But, we have to first fix our problems ourselves. Just as we built our own strong military, we need to build our own strong economy. Unlike Germany or any other European country, we do not need to rely on approval from some other parliament. We can balance our own budget. We can produce our own energy. We can run our own currency. We can innovate and build things better than anyone in the world. But, we need to stop trying to be more like Europe or China, as seems to be the President's plan, and be more like us. Whatever it takes, we must move our budget towards balance. We must firmly reject the debt and socialism that is taking Europe down, and we must unleash the power of our entrepreneurs. You'll hear more from me about some of this in the coming days. But, how about we begin by not extending "temporary" spending and stimulus programs, and instead start to actually make meaningful deficit reductions? And, do so right now?
 
America IS an exceptional nation. These are scary times. But, there is opportunity. Opportunity to show the world the way America does it. We must seize this moment.

Monday, November 28, 2011 - So What Now?

So What Now? Regular readers of this Laptop Report know that I am not surprised by the failure of the 12 members of the "Super Committee" to come up with an agreement for $1.2 trillion in deficit reduction over the next 10 years. But, I am surprised that Speaker Boehner and Senate Majority Leader Reid did not come up with something. Now, because there was no agreement, the so-called "sequester" or automatic cuts are scheduled to become law on January 1, 2012, although the cuts do not actually begin to occur until one year later.

So, you might ask, what happens next? Because of the 23 Senate Democrats who are up for reelection next year, the Senate majority is extremely risk averse. They literally seem as though they don't want to vote on anything with any controversy for fear that either a yes vote or a no vote will cost them popular support at home. Dozens of bills that have passed the House, some by large bipartisan majorities, have not and apparently will not even be considered in the Senate. So, it looks like nothing much is going to happen in dealing with the deficit for some time to come, right?

Actually, not right. Congress has become even more of a deadline-oriented place lately. When something is on deadline, both Houses are forced to either act or accept whatever consequence inaction will bring. The next 14 months are loaded with deadlines. Most of these deadlines are the result of Congress' inability to make permanent reforms, instead preferring to pass only temporary policies. Below, you will find a list of a bunch of major deficit-affecting deadlines that will have to be dealt with between now and January of 2013, as well as the annual dollar effect on the deficit according to CBO. In the interest of fairness, I have not adjusted any of these figures for "dynamic effects". Although we all know that individuals adjust their behavior when a tax goes up, etc. But, CBO only does "static" modeling so that is all I will show you for now. Also, I will give you only the facts and no commentary for now. You can be sure I will get to that as each of these deadlines approach.

As a baseline, understand that the deficit for the fiscal year that just concluded 9/30/11 was $1.3 trillion. The deficit projection for the current fiscal year which ends 9/30/12 is $973 billion under current law.

December 16, 2011 - The "CR" funding the government for this year expires, requiring either another CR or an actual omnibus appropriations bill. This is unlikely to have any net deficit effect because the non-entitlement spending for this fiscal year was established in the August "debt deal" at $1.054 trillion.

December 31, 2011 - The 1% reduction in payroll taxes that was part of the "tax deal" made last December and part of the "Stimulus" expires. If not renewed, payroll taxes will return to where they were before this "temporary" cut in Medicare and Social Security taxes. If this reduction continues, it will increase the deficit annually by $129 billion.

December 31, 2011 - The so-called "doc fix" expires. Back in a prior deficit reduction act, the rates that Medicare pays doctors and hospitals was cut. But, Congress has suspended this cut every year since then, on a year-by-year basis, largely because of concern that many doctors and hospitals would fail or refuse to take Medicare patients. It is currently illegal for doctors to ask the patient to pay the difference. If this "doc fix" were extended, it will increase the deficit by $298 billion over the next ten years.

December 31, 2011 - The increase in unemployment benefits from up to 26 weeks to up to 99 weeks is scheduled to expire. If the maximum period for which an individual can collect unemployment is again extended to 99 weeks, the deficit will increase by $28 billion next year.

December 31, 2011 - The Alternative Minimum Tax (AMT) "patch" is scheduled to expire. The AMT was put into law in 1969 to tax 100 or so "ultra-rich" people who the government believed were not paying enough taxes. (Does this sound familiar today?)  It was never indexed for inflation and now, if not adjusted, would add a "penalty tax" to over 20 million families. The "patch" cuts about half of those people out of the AMT. If it is not extended, it would increase taxes and reduce the deficit by $70 billion per year.

December 31, 2011 - There are a number of business tax credits, including the R&D credit, scheduled to expire. If not extended, these will raise about $35 billion annually for the Treasury.

Sometime next year prior to the election, it is likely that the debt limit will run out again. The failure to pass a balanced-budget amendment to the Constitution (it recently failed in the House by 29 votes with 161 Democrats and 4 Republicans voting to oppose it) reduced the authorized debt limit by $300 billion. The "Super Committee” could have added another $300 billion debt limit with more cuts, but they didn't. And, with the economy nearing a double-dip recession, revenue projections have proved to be optimistic and the deficit greater than was estimated when the "debt deal" was done last August. So, at some point in 2012, this limit will likely need to be extended again or we face another government shut-down.

Sometime in the summer, the US Supreme Court will likely rule on the constitutionality of ObamaCare. If they rule it unconstitutional, much or all of its provisions could be invalidated. That could have an effect on spending for Medicare and Medicaid, but we can’t determine what that might be without knowing which provisions are ruled illegal. However, there is no doubt that ObamaCare does increase deficits.

October 1, 2012 - Fiscal year 2013 will begin and Congress will need to pass both a budget for FY 2013 and a "CR", or the requisite appropriations bills, to fund the government. The deficit could be increased or decreased depending on how much Congress decides to spend.

January 1, 2013 - The extension of the "Bush tax cuts" will expire and tax rates will rise on all US taxpayers, and some people currently not paying income taxes will now have taxable income. If they are extended, the deficit will increase by $3.9 trillion over ten years. If the tax cuts are extended only for those with less than $250,000 income per year, the deficit increase drops by $2.3 trillion over ten years. Note that 60% of the deficit effect of letting the Bush tax cuts expire is funded by taxpayers with incomes under $250,000.

January 1, 2013 – Death taxes are scheduled to rise. Under current law, estates under $5 million are not subject to tax. If there is no extension, estates of $1 million or more will begin paying tax. This is forecast to raise approximately $6 billion per year towards deficit reduction.

January 2, 2013 - The automatic sequestered cuts actually go into effect, reducing "security" spending by $55 billion in the first year and reducing what hospitals and other medical providers are paid by Medicare by 2%. Some in Congress are already calling for these cuts to be changed or repealed before they take effect. This would add $113 billion to the deficit in the first year.

Note that in almost every case, inaction by Congress will result in a tax increase or spending cut taking effect and thereby reducing the deficit. The total of all this is estimated at roughly $800 billion per year, of which over 80% would be increases in taxes or reductions in tax deductions or credits. Understand that none of this involves entitlement programs or benefits except to the extent that doctors and hospitals refuse to accept Medicare if their reimbursements are cut. Taxes would literally increase on everyone who gets a paycheck or has taxable income.

According to CBO, if all of these deadlines were allowed to expire, we would still have a deficit in 2014 of $265 billion. Although that would be hugely reduced from last year's deficit of $1.3 trillion, the deficit would then immediately begin rising again unless the major entitlement programs are reformed.

Tuesday, November 1, 2011 - Heartless Republicans

Heartless Republicans: Those of us who have spent our political careers trying to keep taxes low and rein in government overspending are often called "heartless" by the opposition. I remember a time in the California Assembly when a Democratic colleague went to the floor and accused me of killing children, an accusation which she was forced to retract. Another time on that same floor, a different Democrat inquired how blood ran through my body since I clearly had no heart to pump it.

It is unfortunate that many in society seem to find fiscal responsibility and caring for the needy to be mutually exclusive objectives. It is so unfortunate because it is not true. In fact, I firmly believe that one is necessary to do the other.

As regular readers of this missive know, I believe that it is our moral imperative to care for those in need around us. But, where I differ from some of our more liberal friends is on the means to accomplish that goal. President Lyndon Johnson declared "war on poverty" back in the 60s. Tons of new programs were set up and tens of trillions of dollars have been spent on this "war" in the intervening 40+ years. And, after all this time, effort and money, the poverty rate in the United States is only down 0.4% from where it stood when Johnson made his declaration. Had this been a shooting war, we would have withdrawn or regrouped years ago. Had this been a business objective, the strategy would have long since been thrown out and restructured.

Democrats and Republicans do not have disparate objectives here. We only differ on how to accomplish the objective. Frankly, whether it’s the needs of the poor or a military matter or an environmental policy, throwing money at a problem without achieving results does not exhibit compassion. In fact, doing so can even be counterproductive to the very goal we all wish to achieve.

Therefore, there are 3 principles which I use to guide my decision making on caring for the needy in our communities:

1. Accountability: We always talk about providing for the poor, the sick and the disabled. Again, there is no disagreement that this is a worthy goal. But, the fact is that many programs set up to help these people are taken advantage of by the corrupt, the dishonest, and the lazy. It may come as a shock to some of us, but not all human beings are good and honest.  When someone who is able to work simply decides not to and takes money intended for those who cannot work, he or she takes that money directly from the mouths of the needy. Programs must have the ability to actively exclude the one group in order to provide for the truly needy, or they will not succeed in their mission.

2. Community: No matter where you live in America, you have needy people nearby. It could be a homeless person or a person whose home was just destroyed by natural disaster. It could be the victim of a crime or the victim of a terrible disease. It could be an orphan or a widow. And, yes, there is tremendous human suffering occurring all over the world. We have compassion for it and we want to stop it. But, charity begins at home. I have always felt that our first obligation is to our family, our friends, our neighbors, and our community. Afterwards, we can look to the rest of the world. America is a wealthy nation. But, it is abundantly clear that we are not rich enough to police the world with our military or to feed and clothe the world with our tax dollars. Federal policy should not ignore starving children in Africa, but our first obligation should always be to hungry Americans. Those of us who believe in strong borders and firmly enforced immigration laws hold this as a fundamental maxim. We cannot have every needy person from other countries come to America illegally and then demand free benefits or expect to be taken care of for life. Our boat will sink if we do that, and then we cannot help anybody.

3. Private Partnerships: Government organizations give aid to the needy. And, faith-based organizations give aid to the needy. I have closely observed both. The faith-based organizations, because of the depth of commitment and passion guiding their service, are undeniably more effective and deliver a much more personal and lasting impact than a bureaucratic program. That is not to say that all aid should be dispensed by faith-based groups. But, we should certainly be supporting, and not hindering, private and faith-based aid groups so that they can grow and expand their philanthropic mission in this nation.

The Democratic Party does not have a monopoly on compassion. When Democratic politicians accuse Republicans of "heartlessness" because the latter are merely disagreeing about effective methods of help, they are wrong. It is just as wrong as when Republicans accuse anti-war Democrats of not being patriotic. The fact is that it is neither unpatriotic nor cruel to have a different view on how to deal with threats to our security or the problem of poverty.

And, yes, my doctor has recently confirmed the existence of a heart beating within my chest.