Why the Republicans are considering a tax increase

Recently the story that Republicans are in favor of allowing the payroll tax to increase over President Obama’s opposition has been making the rounds on the internet. The story, presented as evidence of Republican hypocrisy on taxes, is more complex than it seems.

The cut in the payroll tax stems from last year’s compromise to extend the low, Bush-era tax rates for all Americans. A provision of the compromise deal lowered the Social Security payroll tax from 6.2 percent to 4.2 percent for employees during 2011. Employers were still required to pay the full 6.2 percent for their portion of the payroll tax. The self-employment tax was also cut by two percent. If not extended, the payroll tax will return to 6.2 percent for employees at the end of the year. The employer portion will remain the same.

The tax cut obviously did not stimulate economic growth. Economic indicators have trended negative over the past few months leading many economists to predict that a second recession is increasingly likely.

Speaking to the Associated Press, Rep. Jeb Hensarling (R-TX) said, “It's always a net positive to let taxpayers keep more of what they earn, but not all tax relief is created equal for the purposes of helping to get the economy moving again."

The payroll tax cut is an example of the most ineffective type of tax cut, one that is temporary, targeted, and tiny. From the beginning, the payroll tax cut was only meant to last for a year, which means that it would not affect long term economic decisions. It was targeted to employees, and did not apply to the employer match, where it would have had a greater impact.

Perhaps most important, the payroll tax cut was tiny. For a worker earning $50,000 the two percent tax cut is worth $1,000 for the year. However, the taxpayer does not get this savings all at once. It is prorated throughout the year in each paycheck. This means that the true savings is only $83 per month. If a worker is paid weekly, it amounts to only $20 per paycheck. This is not even enough to buy a tank of gas and is barely noticeable to most workers.

Social Security payroll taxes only apply to the first $106,800 of income. Therefore, the largest savings that any worker would realize from the tax cut, no matter how much they earn, would be $2,136. This translates to $178 per month or $41 per week.

Conversely, the payroll tax is used to fund Social Security which, under current estimates, will go bankrupt by 2036. That year the trust fund will be exhausted and Social Security will no longer be able to pay benefits without using current taxes. In 2010, Social Security expenditures exceeded revenues. Social Security is already operating in the red.

For 2010, Social Security tax receipts were $865 billion according to the Congressional Budget Office. Half of this money was paid by employers and half, $432.5 billion, was paid by workers. The two percent tax cut would be equivalent to $8.65 billion. This figure is slightly more than one percent of Social Security’s 2010 expenditures of $700 billion.

Since the payroll tax cut was too small to produce economic growth, it follows that allowing it to expire would have a minimal impact on the economy. Even a small impact might tip the scales toward recession though. On the other hand, the increased revenue might be able to buy a little more time to reform Social Security before the entitlement program goes bankrupt. The money in question is a tiny part of Social Security’s annual expenditures. Neither option is likely to be palatable for Republicans.

Nevertheless, it is likely that Republicans will agree to extend the payroll tax cut. Former house speaker and current presidential candidate Newt Gingrich was quoted by Talking Points Memo as saying, “I think it's very hard not to keep the payroll tax cut in this economy. I don't know what Republicans are going to say but I think it's very hard to say 'no.' We're going to end up in a position where we're gonna raise taxes on the lowest income Americans the day they go to work and make life harder for small businesses.”

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Economist proposes “space alien” stimulus

In a tacit admission that the left is out of ideas on how to fix the economy, economist and New York Times columnist Paul Krugman recently proposed a new stimulus program in the form a military buildup to ward off an invasion by extraterrestrial aliens. Drawing upon the history of the Great Depression and an episode of “the Twilight Zone,” Krugman postulated on CNN that government spending on military hardware to combat aliens would revitalize the U.S. economy in short order. Krugman subscribes to the Keynesian belief that World War II and the debt-financed military buildup that followed finally ended the Great Depression after ten years of FDR’s debt-financed social programs failed to restart the economy.

In reality, the military buildup of the 1940’s and the New Deal stimulus programs were very similar. The military draft that removed hundreds of thousands of workers from unemployment rolls had civilian equivalents in the Civilian Conservation Corps, the Works Progress Administration and other New Deal government organizations that hired workers for make-work projects. Similarly, government orders for military hardware that busied factories were akin to New Deal construction projects commissioned by the Public Works Administration and the Civil Works Administration.

Krugman doesn’t actually believe that an alien attack is imminent. He merely favors a hoax to provide a rationale for spending:

“If we discovered that space aliens were planning to attack and we needed a massive buildup to counter the space alien threat - and really inflation and budget deficits took secondary place to that - this slump would be over in 18 months. And then if we discovered, oops, we made a mistake there aren't actually any space aliens.”

“There was a Twilight Zone episode like this, which scientists fake an alien threat in order to achieve world peace. Well, this time we need it in order to get some fiscal stimulus.”

Krugman, a Nobel Prize winning economist, misses several important points here. The most obvious is that the U.S. is already at war. We don’t have to invent an extraterrestrial enemy because we have a very real terrestrial enemy in the form of Islamic terrorist groups. The wars in Iraq and Afghanistan have caused wear and tear on military equipment. The government could spend money to replace and refurbish our existing military hardware, as well as purchasing more F-22 Raptor and F-35 Lightning II advanced technology fighters that would ensure air superiority against a new generation of high-tech Chinese and Russian fighters. The F-22 is a built by Lockheed Martin at its plant in Marietta, Ga. Presumably real world military spending is not large enough in Krugman’s eyes.

The second point that Krugman misses is that spending on WWII did not actually jumpstart the economy. The problem is that removing hundreds of thousands of idle workers from the economy and purchasing millions of dollars of tanks, aircraft, and other equipment is not a change that could be sustained indefinitely. When the war was over, as the armed forces demobilized these workers would likely return to the unemployment line and the factories would go idle if the government did not fund new New Deal programs to provide jobs and demand for material goods. In reality, this is not what happened.

In the Wall Street Journal, Burt Folsom, author of “New Deal or Raw Deal,” notes that Congress, led by Georgia Senator Walter F. George, rejected President Truman’s attempts to revive New Deal policies after the war. According to Folsom’s research, Congress reduced income tax rates across the board, cut the corporate tax rate, and repealed the Excess Profits Tax. According to tax.org, the tax reforms and reductions began even before the war ended with the Tax Adjustment Act and the Revenue Act of 1945. The Revenue Act of 1948 was smaller, but included more comprehensive and controversial reforms.

Senator George, a resident of Vienna, Ga. who served on the Senate Finance Committee at the time, is quoted by Folsom as saying that if the tax reform “has the effect which it is hoped it will have, it will so stimulate the expansion of business as to bring in a greater total  revenue." As a chart on USgovernmentrevenue.com shows, federal revenues increased dramatically in the 1950’s even though tax rates were lower than they had been during the New Deal and war years.

Finally, Krugman ignores the fact that federal debt levels today are much higher than they were at the onset of WWII. Data from USgovernmentspending.com reveals that the federal debt as a percentage of GDP is almost as high today as it was at the end of WWII, not the beginning. The government could afford to spend billions on tanks and armies in 1941 because, even after a decade of New Deal spending, the federal debt was less of a burden than it is today. If the U.S. tried to engage in another massive military buildup today, the debt would shortly become unmanageable and the result would either be a default or inflation (which Krugman also advocates).

Krugman’s idea of an anti-alien buildup is simply a sci-fi twist on the same old Keynesian policies that have failed to work for President Obama in the past. President Obama should instead follow Senator George’s example and enact broad-based, permanent tax reforms that would encourage businesses to invest.

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Meet the candidates: Jon Huntsman

Jon Huntsman was born in California, but grew up in Utah. His father is the founder of Huntsman Corp., a global chemical company.

Huntsman dropped out of high school in his senior year in order to pursue a music career as keyboard player for his band, “Wizards.” His website notes that with “priorities adjusted,” he earned a G.E.D. and entered the University of Utah the next fall. After taking two years to serve as a Mormon missionary to Taiwan, Huntsman returned to enroll at the University of Pennsylvania where he graduated with a bachelor’s degree in International Politics.

His political career began almost immediately, first as an intern for Senator Orrin Hatch and then as a staff assistant to President Reagan. Huntsman has served in a variety of appointed diplomatic positions beginning with the first Bush administration. He served as Deputy Assistant Secretary for East Asian and Pacific Affairs, Deputy Assistant Secretary of Commerce for Trade Development, and Ambassador to Singapore for President George H. W. Bush. In the administration of George W. Bush, he was a Deputy Trade Representative and a Trade Ambassador. He also served as President Obama’s Ambassador to China until he resigned to run for president. While in China, Huntsman’s name was censored from internet searches by the Chinese government after he was captured on video at a Jasmine Revolution protest.

Huntsman has also held elected office, serving two terms as governor of Utah. He was a very popular governor, winning re-election with more than 70 percent of the vote. According to the Deseret News, his approval ratings were as high as 90 percent.

Huntsman’s tenure as governor was marked by business-friendly policies and tax cuts. He introduced an optional flat tax with a lower rate and cut the state sales tax on food according to the Cato Institute. The institute also notes that spending increased 10 percent annually during his tenure, however.

Huntsman also has a business experience with the family firm. According to Project Vote Smart, he has served as CEO of the Huntsman Family Holdings Company and the Huntsman Cancer Foundation as well as Chairman of Huntsman Corp. He has also served as a board member for numerous charitable organizations.

Huntsman has a strong record on diplomacy and economic policy, but his record on social issues will cause problems with many Republican voters. He is a supporter of civil unions for homosexual couples, although he does believe that marriage is between a man and a woman. He has also stated in a tweet that he believes in evolution and global warming. In a 2007 video clip, Huntsman also said that he was “comfortable” with a “requirement” for health insurance.

Huntsman does have a conservative position when it comes to abortion. He supports a right-to-life amendment according to the Salt Lake Tribune. As governor, he signed several bills that limited abortions including a parental notification law and a law that required that women be informed that a fetus can feel pain.

In the most recent Real Clear Politics average of polls, Huntsman placed second to last with 2.2 percent of respondents supporting him. The only candidate to fare worse was former Pennsylvania senator Rick Santorum. In an Insider Advantage poll of Georgia voters, Huntsman received only one percent. He may boost his numbers in Georgia when he comes to Atlanta this week. He will attend fundraisers on August 23 and meet with Georgia Republican leaders on August 24.

Jon Huntsman has a strong economic and foreign policy background, but his moderately liberal stance on social issues is troubling for conservatives. He would likely appeal to libertarian-leaning Republicans if Ron Paul were not already in the race and more well known. Nevertheless, his deep pockets make it possible for him to continue the race even with little support.

 

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Rick Perry takes lead in Georgia

Texas Governor Rick Perry, who has been a candidate for the Republican presidential nomination less than a week, has jumped to a commanding lead in Georgia. In an Insider Advantage poll released on August 19, Perry was preferred by 24 percent of likely voters in Georgia.

The second place candidate, Georgia native Herman Cain, was selected by fifteen percent of the respondents, trailing Perry by nine percent. Another Georgian, Newt Gingrich, finished a distant third with nine percent.

Michelle Bachmann, winner of last weekend’s Ames Straw Poll in Iowa, was in a fourth place tie with fellow Republican woman, Sarah Palin, who has not announced her candidacy. Both women had eight percent. Putative national frontrunner Mitt Romney finished fifth among Georgians with only six percent, one fourth of Perry’s support. Ron Paul and Jon Huntsman finished last with five and one percent respectively. Former senator Rick Santorum and Gary Johnson, the former governor of New Mexico, did not rate separately in the poll, but were included in the four percent of Georgians who chose “other.” Support for Tim Pawlenty, who has already withdrawn, would also be included in this category.

Significantly, twenty percent of Georgians are still undecided about who to vote for. The Georgia primary will be held on February 7, which leaves less than six months for the candidates to compete for the fifth of the Georgia electorate that remains undecided.

The result of the Georgia poll may be a harbinger for the nation at large. The most recent Real Clear Politics average of polls shows Romney and Perry in a statistical dead heat, where Romney has a slight edge. However, most of the national polls were taken before Perry’s candidacy announcement. The single poll taken in the past week by Rasmussen Reports is the only one that shows Perry with a lead. In that poll, Perry leads Romney by a margin of 29-18 percent. The remaining candidates are confined to single digits in the RCP Average.

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Meet the candidates: Rick Santorum

Rick Santorum is a native of Virginia, who grew up in West Virginia and Pennsylvania. In school, he was nicknamed “Rooster” because of his hair’s tendency to stick up and the fact that he did not back down. After his parents, who worked for the VA hospital system, were transferred to Illinois, Santorum graduated from high school there. His father was an Italian immigrant and his mother was half Italian, half Irish.

After high school, Santorum returned to Pennsylvania to attend Penn State. He graduated with a degree in Political Science and then went to the University of Pittsburgh for an MBA. Santorum then returned to Penn State to attend the Dickinson School of Law. He graduated with a Juris Doctor in 1986.

While in graduate school, Santorum became administrative assistant to a state senator, and then served as director of the Pennsylvania Senate’s local government and transportation committees. In 1986, Santorum entered private legal practice with a Pittsburgh firm. While at the firm, Santorum represented the World Wrestling Federation and argued that the WWF should be exempt from federal steroid rules since it was not a sport.

While he was practicing law, Santorum met his future wife, Karen, who was living with a cofounder of Pittsburgh’s first abortion clinic. According to the Philadelphia City Paper, at this point in his life, Santorum was pro-choice and not religious. Santorum married Karen and was first elected to public office in 1990 as a member of the U.S. House of Representatives. In 1992, he was a member of the “Gang of Seven” that exposed the House banking scandal.

In 1994, he was elected to the U.S. Senate. The City Paper details how, at the same time that Santorum was leading the fight to override President Clinton’s veto of the partial birth abortion ban, Karen was pregnant with a child that was revealed to have a birth defect that would be fatal after birth. Karen became ill with a 105 degree fever and doctors warned that she could die unless they induced labor. Since this would undoubtedly kill the 20 week unborn baby, the Santorums considered inducing labor equivalent to an abortion. Before they made a decision, Karen went into labor. The baby, Gabriel Michael Santorum, died two hours after his birth.

Gabriel’s short life changed the Santorums. Karen later published a book of letters to her unborn child. In one, she exhorts the senator to “proclaim God's message for life with even more strength and devotion to the cause.” For his part, Rick wrote that “after Gabriel, being a husband, being a father was different, being a legislator was different. I was different" (as quoted by the City Paper). Santorum keeps a photo of newborn Gabriel on his desk.

Santorum was re-elected to the senate in 2000, but lost in the Democratic landslide of 2006. Because of his outspokenness on socially conservative issues, Santorum was a prime target for Democrats. With Santorum’s loss, the senate tradition of the candy desk, a stockpile of sweets maintained by Pennsylvania Republicans, came to an end.

After leaving Washington, Santorum returned to practicing law with a different firm in Pittsburgh. In 2008, he campaigned for John McCain. Santorum also became a member of the Board of Directors of Universal Health Services and a member of the Ethics and Policy Center, a conservative think tank. He has also been a contributor to Fox News.

Santorum is a stalwart supporter of the pro-life cause. He believes that life begins at conception and that abortion should be banned, even in cases of rape and incest. Even though most Americans now consider themselves pro-life, most also support some exceptions to an abortion ban according to Gallup.

He is also an opponent of homosexual activism. He is an outspoken opponent of gay marriage and supported the right of states to enact sodomy laws (which have since been struck down by the Supreme Court) in a 2003 USA Today interview. Santorum correctly pointed out that the right to privacy is not found in the Constitution.

Santorum’s outspokenness has earned him the ire of homosexual and pro-choice activists. For the past eight years they have engaged in a campaign to name a deviant sex act for him. By driving up “clicks,” the activists have placed their definition of his name near the top of the Google search list according to ABC News. Santorum is a target for mainstream Democrats as well. The Georgia Young Democrats tweeted in June “Rick Santorum, an attorney, thinks he knows more abt [sic] science than scientists?” in reference to his skepticism of global warming.

Further, Santorum has also been a vocal opponent of Islamic terror. In 2006, he was one of only two votes against the confirmation of Robert Gates as secretary of defense, citing Gates’ belief in diplomatic engagement with Iran and Syria. He strongly supported the War on Terror and has spoken out against “Islamic fascism.”

Most recently, Santorum was reportedly peripherally involved in the sex scandal and resignation of Republican Senator John Ensign. Santorum was sent an email from Doug Hampton, Ensign’s former chief of staff and husband of the woman with whom Ensign had an affair. Santorum allegedly forwarded the email to Ensign as a warning of the impending scandal. Georgia Senator Johnny Isakson was one of the senate investigators who found that Ensign probably violated federal law in an attempt to cover up the scandal. Santorum faces no charges.

Nationally, Santorum placed last in the most recent Real Clear Politics average of polls. His average rating was only 1.8 percent. In an August poll of Georgians by Insider Advantage, Santorum did not rate at all. His support was counted among the four percent of Georgians favoring “other.”

Georgians have much to like about Rick Santorum. The former senator’s social conservatism and religious beliefs are something that most Georgians agree with and his history of government reform and fiscal restraint should endear him to the Tea Party. Conversely, Santorum’s long history as a political insider and his landslide loss to Bob Casey in the 2006 senate re-election campaign may lead many conservative voters to look for new faces.

 

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Obama’s attacks on corporate jets cost jobs

One of President Obama’s frequent talking points is about the wastefulness and elitism of corporate jets. In a June 2011 news conference, CNS News quotes the president as saying, “I’ve said to some of the Republican leaders, you go talk to your constituents, the Republican constituents, and ask them are they willing to compromise their kids’ safety so that some corporate jet owner continues to get a tax break.”

In contrast to the president’s statements, corporate jets are a valuable business tool. Many factories and business deals are found in far flung areas of the country that are not served by airlines or, after years of airline downsizing and bankruptcies, have only very limited service. While it is easy to find direct flights from Atlanta to every major metropolitan area in the country, smaller cities are primarily served by regional airlines and require layovers and connecting flights which add significantly to the length of the trip. This also increases the chance of delays and canceled flights.

Parking, security screening, checking and waiting for bags, and finding transportation all add to the nonproductive time when traveling through major commercial airports. It can take a traveler over an hour to get out of Atlanta’s Hartsfield-Jackson International Airport and the airlines typically advise travelers to arrive at least two hours early.

With the current federal debt crisis, Congress is also considering cuts to the essential air service program. Under this program, the federal government subsidizes flights to small cities that would otherwise be unprofitable to airlines. If airline service to these smaller cities is dropped, it would mean that business travelers would have to fly to the nearest city served by an airline, then rent a car to continue their journey. This would mean a dramatic increase in the time required to make the trip. In the case of deliveries of parts and tools needed to keep a factory running, it might mean that the plant would be shut down for days until the shipment could arrive by ground.

Corporate aviation is a commercial lifeline to many small communities around the country. Hartwell and Elberton, both in northeast Georgia, recently became the sites for new plants for SD Automotive Group and Moeller Tech Plastics respectively. These towns are over two hours from the nearest commercial airport, but they are served by Elberton’s general aviation airport with a 4,000 foot runway. Tifton is home to a new American Textile Company plant. The South Georgia city is an hour drive from Albany, which has only three airline flights each day, or a three hour drive to Atlanta’s international airport. Tifton has its own general aviation airport, however, with a 5,500 foot runway that is suitable for even larger corporate jets. These are examples of plants that might locate in urban areas, adding to urban congestion and rural unemployment, if small airports and corporate jets were not available. Time is money.

Georgia is also home to Gulfstream Aerospace, a manufacturer of high-end business jets that is located in Savannah. When sales of business jets plummeted after Barack Obama became president and criticized auto executives for using their company airplanes, Gulfstream, like many other aircraft builders, was forced to lay off thousands of workers.

Georgia’s fixed-base-operators are more affected by the downturn in aviation. Fixed-base-operators (FBOs) are private air terminals that service corporate jets and other general aviation airplanes. When corporate jets don’t fly, these companies, such as the three FBOs at DeKalb-Peachtree airport in Atlanta, lose hundreds of thousands of dollars in revenue from fuel sales and maintenance. When FBOs don’t make money, it inevitably leads to the layoff of workers.

The effect trickles throughout local economies when corporate jets do not fly. When fewer passengers and pilots fly into a community, local businesses suffer as well. There are fewer guests at local hotels and fewer diners at local restaurants. Since the old saw about more business being conducted on the golf course than in a boardroom is still true, local golf clubs would also feel a pinch.

President Obama is offers a false choice between tax breaks for the rich and safety for children. The real choice is between allowing companies to use airplanes as a legitimate and valuable business tool or stigmatizing corporate jets that bring jobs to Georgia.

 

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Who pays taxes

Recently there have been a number of calls by liberals ranging from President Obama to Warren Buffett for the “wealthiest Americans” to pay their “fair share” in order to help the economy recover. According to this theory, taxes for the rich were cut to virtually nothing by President Bush. This led to the deficits and mounting national debt that we face today.

According to 2008 tax data, the most recent that is available from the I.R.S, in the Heritage Foundation 2011 Budget Chart the prevailing liberal view that rich Americans are getting a free ride is not accurate. The top one percent of wage earners paid 38 percent of all federal income taxes in 2008. When the view is expanded to include the top 10 percent of wage earners, the richest 10 percent of Americans paid almost 70 percent of all taxes. Conversely, the bottom 50 percent of wage earners paid less than three percent of all taxes in 2008. Democrats have not said what percentage of the tax burden they believe would constitute a fair share.

Interestingly, the charts show data back to 1980, so claims that tax cuts benefit the rich can be examined on a yearly basis. Under President Reagan, taxes were cut in by the Economic Recovery Act of 1981 and the Tax Reform Act of 1986. The tax data for the top one percent earners shows that their share of the tax burden rose after the 1981 tax cuts. In 1986, their tax burden rose over 1985, but declined in 1987. It rose sharply in 1988, before declining as the economy slowed to a recession in the early ‘90s. After falling with the recession of 2000, the tax burden of the top one percent rose to over sixty percent, an all-time high, in 2007 after the Bush tax cuts. The tax burden of the top one percent earners has doubled since 1980, in spite of several rounds of tax cuts.

When the bottom 50 percent earners are examined, the results are the opposite. The bottom 50 percent’s tax burden peaked in 1981 at 7.45 percent. Their tax burden declined slightly after the 1981 tax cuts, but fell sharply in 1986 and after. In 2008, the tax burden of the bottom 50 percent was less than half of the amount of their 1980 tax burden. This is because many low-income families have been totally removed from the tax rolls. An astonishing 47 percent of Americans don’t pay any federal income tax at all according to Yahoo Finance.

Because of the system of tax withholding, many people may not even realize that they don’t pay taxes. These people may have federal income taxes deducted from their paychecks, but then get a refund of all income taxes paid when they file a tax return. Unless a taxpayer examines their tax return closely, they will not know how much they actually pay in taxes, or whether they pay them at all.

The Tax Foundation publishes data which examines the net cash flow to the federal government from the states. The most recent data is from 2005. The states that send the most tax revenue per capita to the federal government were Connecticut, New Jersey and Massachusetts. The states that paid the fewest taxes per capita were West Virginia, Louisiana and Mississippi.

The states that pay the most taxes do not receive the most federal spending however. The states with the highest ratios of federal spending to tax dollars per capita were New Mexico, Mississippi, and Alaska. The states with the lowest ratios were Connecticut, Nevada, and New Jersey. In practice, this means that blue states with high wages and high costs-of-living are subsidizing red states.

Georgia, which ranks 29^th in taxes paid and 40^th in federal funds received, has historically received federal funds that are approximately equal to the taxes that it sends to Washington. Georgia ranked 34^th in the ratio of federal spending per taxes paid.

When Warren Buffett tells says that millionaires don’t pay their fair share, he isn’t telling the whole story. Much of Buffett’s income is from capital gains and dividends, which are taxed at 15 percent. But this money has already been taxed once as corporate income, which is currently taxed at 35 percent, the highest corporate tax rate in the world. Second, Buffett uses the charity deduction to avoid paying taxes on much of his income. He is a generous giver to a variety of charities and, in 2006, made the largest donation to charity ever given by an individual, a $37 billion donation to the Bill and Melinda Gates Foundation. This gift was tax-deductible.

Buffett’s company, Berkshire Hathaway owns several Georgia companies including Berkshire Hathaway Homestate, an insurance company in Alpharetta. Shaw Industries, the world’s largest carpet manufacturer which is headquartered Dalton, is a Berkshire Hathaway company. Berkshire Hathaway is also heavily invested in other companies that many Georgians recognize including Wal-mart and Costco.

Far from being an answer to the country’s spending problem, the Wall St. Journal reports that millionaires are an endangered species. Between 2007 and 2009, the number of millionaires fell from 390,000 to 237,000. This is a decline of 39 percent. With fewer millionaires to “share the sacrifice,” Democrats will have no choice but to turn to the middle class to finance their spending spree unless federal spending is cut sharply.

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The George Costanza plan to save the economy

A Facebook friend recently objected to my criticisms of President Obama and the Democrat’s handling of the economy. Over the past years and months I have written about many possible solutions to the economic and debt crises that threaten to send the United States into a second recession or worse, a depression.

In a memorable episode of “Seinfeld,” George Costanza decides that since his every instinct is wrong, he should do the opposite of what he would normally do. As Jerry put it, “If every instinct that you have is wrong, then opposite would have to be right.” President Obama has had similar bad instincts on the economy and should adopt a similar strategy. Since President Obama’s fiscal policies have hastened the crisis and dramatically increased the federal debt while at the same time slowing the normal recovery cycle, a good start would be to do the opposite of what he has been doing for the past three years. The opposite of Obama’s past policies would be policies that have worked previously in U.S. history, notably under Presidents Harding, Coolidge, Kennedy, Reagan, and Bush.

To this point, President Obama has focused on top-down solutions. These programs have been expensive and ineffective. The opposite would be a new focus on free market solutions in which the government empowers business rather than targeted initiatives and government spending. There are currently 6.2 million people unemployed in the United States according to the Bureau of Labor Statistics. Another 8.4 million are underemployed because their hours have been cut back or they cannot find a full time job. In Georgia, an estimated 467,000 people are unemployed. Even spending trillions of federal dollars cannot provide jobs for all these people.

Alternatively, history has shown that if the government cuts spending, tax rates, and regulation then the economy will rebound. As the economy grows, demand for products will rise, businesses will expand and hire new workers. The unemployment rate will decline at no cost to the government.

President Obama should avoid his instincts that lead him to look at government spending as a solution to every problem. The federal deficit was a problem long before President Obama took office, but his spending has made it dramatically worse. The U.S. recently received an unprecedented downgrade of its credit rating from Standard and Poors. Downgrades from other rating agencies are likely if the country continues on its current course.

It is time for President Obama to keep his campaign promise to “go through the federal budget, line by line, eliminating programs that no longer work and making the ones we do need work better and cost less.” The president should start by eliminating government programs that duplicate the same role or provide the same service. Programs that compete with private businesses or which could be accomplished more efficiently by private business should be cut.

The remaining programs should be examined in light of the government’s Constitutional role. If a program is extra-constitutional (i.e. not mentioned in the Constitution), its existence should be closely examined. Extra-constitutional programs are not necessarily unconstitutional (prohibited to the federal government or reserved to the states), but they are likely a distraction from the government’s primary roles and a cost that the U.S. can no longer afford. There are many good and worthwhile programs that there the U.S. simply does not have the money to pay for any longer.

Any debt reduction must include reform of entitlements. While these programs were originally well-intentioned, they have grown to unmanageable proportions and threaten to bankrupt the federal government. A Wall Street Journal article lists Social Security, Medicare, Medicaid, and interest on the federal debt as the four largest expenditures of the federal government. These four items are more expensive that the combat operations in Iraq and Afghanistan or foreign aid to other countries.

Entitlement reform should include making these programs true safety nets rather universal entitlements. People who can afford to pay for their own retirement or health care should be encouraged to do so. For others, the government should implement cost-sharing to encourage price-shopping and reduce consumption. As life expectancies increase, the retirement age must be increased. The programs should be closely policed for fraud and abusers should be prosecuted to the fullest extent of the law.

Thus far, Rep. Paul Ryan of Wisconsin is the only politician of either party to submit a detailed plan for entitlement reform. Ryan’s plan would not affect benefits for current retirees. Vouchers for private insurance would be phased in over time and would give seniors a choice in the health insurance. Medicaid would be transformed into block grants that would encourage states to find savings and efficiencies. Younger workers would be given the option to place part of their Social Security tax into a private retirement account, rather than depending on the soon-to-be-bankrupt Social Security program.

President Obama should resist his impulse to call for higher taxes and more shared sacrifice. In a fragile economy such as this, raising taxes will guarantee another recession. Ironically, as the economy shrinks from the recession, federal tax revenues will actually decline even with higher tax rates.

The best way to boost tax revenues is through reform of the tax system to grow the economy. When state and local taxes are included with federal taxes, the U.S. tax burden is higher than many other countries. The U.S. corporate tax rate is one of the highest in the world. Reforming the tax system with lower rates and fewer deductions would make the U.S. more competitive internationally while simultaneously lowering the cost of compliance. This would help to jumpstart the economy and grow tax revenues. Even better would be a flat tax or the Fair Tax, a consumption tax that would replace the income tax entirely, but politically these are not yet workable.

The president should also declare a moratorium on new federal regulations. The Obama Administration has introduced a plethora of new regulations that both stifle business creativity and make it more expensive for companies to do business. The Dodd-Frank financial reform added substantially to costs of financial businesses while completely ignoring Fannie Mae and Freddie Mac, the government-sponsored entities that were the end purchaser of the subprime loans that led to the 2008 financial crisis. Some banks are choosing to go out of business rather than operate at a loss in the current regulatory environment. Obamacare added multiple costly layers of regulation to the health insurance industry. The Obama Administration was sued and lost over its offshore oil drilling ban. When the government still refused to issue drilling permits, a judge found Obama’s Interior Department in contempt.

More recently, the Obama Administration mandated an increase in the corporate average fuel economy (CAFÉ) standard to 54 miles per gallon by 2025. This change will hurt American car companies and consumers by increasing the price of cars and making it more likely that they will be built from lighter, less crashworthy, materials. This may eventually cost Georgia jobs from its automotive industry, including the new Kia plant in West Point.

In some cases, when Congress rejected its regulatory proposals, the Obama Administration enacted them unilaterally through federal agencies in the executive branch. When Congress voted down net neutrality, the FCC announced rules that would enact it anyway. When Congress could not pass cap-and-trade of carbon, the EPC decided to regulate it under the Clean Air Act. There have threats that the National Labor Relations Board could make a similar move to enact Card Check with congressional approval. The NLRB has already decreed that Boeing, a unionized company, cannot build a new factory in South Carolina, a right-to-work state.

There is little wonder that the business investment is stalled when federal regulations are issued so often and arbitrarily. Grover Norquist of Americans for Tax Reform estimates the cost of complying with federal regulations at $2.8 trillion annually. If the government enacted a moratorium on new regulations and comprehensive review of existing ones, that money could be spent much more productively.

The Affordable Care Act should be repealed. This law, often called “Obamacare,” is an example of all that is wrong with the government. The law costs trillions of dollars according to the Congressional Budget Office, while at the same time making health insurance and health care more expensive for consumers. Obamacare includes a host of new taxes and expensive regulations that make it less likely that businesses will hire. Obamacare was poorly conceived and executed and is a drag on the economy. It has already been ruled unconstitutional by a federal appeals court in Atlanta. The lawsuit brought by more than half of the states, including Georgia, will soon be heard by the Supreme Court.

As he has frequently reminded us, President Obama did inherit a tough economy from President Bush. However, what makes a president is rising up to handle the hand that has been dealt. Now three years into his presidency, it is the results of President Obama’s decisions that are haunting the nation. If he persists in following the same course, he will continue to get the same dismal results and in January 2013 will leave a worse mess for his successor than he himself inherited.

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Poll: Most Georgians approve of Obama

According to a new Gallup poll, a slight majority of Georgians approve of President Obama’s job performance. By a margin of 48 to 44 percent, Georgians favor the president. The approval rating is actually one point higher than the percentage of the vote that Obama won in Georgia in 2008.

While not in the top ten Obama-approving states, at number twenty Georgia ranks higher than many of the swing states from the 2008 election. This fact is somewhat surprising considering the size of the Republican victory in Georgia in 2010.

Florida falls just after Georgia with a 47-45 approval margin. North Carolina is next with a 46-46 split. Two other swing states, Ohio and Indiana, both disapprove of President Obama. Ohio’s margin is 45-47 percent, while Indiana’s is 42-50 percent. All four states were won by President Obama in 2008.

Missouri and Montana, two swing states won by John McCain in 2008, now strongly disapprove of President Obama. Missouri disapproves by 42-50 percent. Montana is one of the most unfavorable states to Obama. Thirty-six percent of Montanans approve of the president, while 55 percent disapprove.

President Obama’s national approval rating is 42 percent according to Gallup, which means that his approval in Georgia is actually higher than the national average. President Obama’s strongest support is in the northeastern states as well as Illinois, Delaware, Maryland, and Hawaii. His strongest opposition is in the South and Midwest.

In what must be seen as a disturbing sign for the Obama re-election campaign, the president’s approval rating was higher than fifty percent in only sixteen states and the District of Columbia. This means that even before the unpopular debt ceiling compromise, Standard and Poor’s downgrade of the U.S. credit rating, and this week’s turmoil in the financial markets President Obama faced an uphill battle in next year’s presidential campaign. The state polls were taken from January through June 2011 so the president’s approval rating could be much worse than the polls reflect given the upheaval of the past few weeks.

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Meet the candidates: Rick Perry

As the presidential race heats up, a popular governor of Texas may be poised to sweep the head of the pack of forgettable Republican candidates. This is not a flashback to the 2000 presidential primaries that ended in the nomination of George W. Bush, but a possible outcome of the 2012 primary should current Texas governor Rick Perry decide to enter the race as appears increasingly likely.

Perry is a native Texan and a graduate of Texas A&M. After college, he joined the Air Force and served as a pilot of C-130 Hercules transports. After leaving the Air Force, Perry returned to Texas where he joined the family business as a cotton farmer.

Perry’s political career began as a Democrat in the Texas House of Representatives in 1984. Even as a Democrat, Perry was fiscally conservative. In the Texas house, he was a member of the “Pit Bulls,” a group of appropriations committee members who fought spending increases.

In 1988, Perry was the Texas chairman for Al Gore’s presidential campaign. The next year he changed his party affiliation to Republican saying, “I came to my senses” according to Politifact.com. Immediately after becoming a Republican, Perry was elected Agriculture Commissioner, an office that he held for two terms. In 1998, he became the first Texas Republican lieutenant governor since Reconstruction. In 2000, he became governor when George W. Bush resigned to become president of the United States. Since then, he has won re-election twice.

Gov. Perry presides over one of the few bright spots in the current economy. CNN Money notes that Texas, with no state income tax, has one of the lowest combined state and local tax burdens of any state at 8.4% placing it forty-third out of the fifty states. Georgia’s combined tax burden is 9.9% for a rank of thirteen. The Tax Foundation ranks Texas as one of the most business-friendly states at thirteen. Georgia ranks twenty-fifth.

Low taxes and regulation have paid off. According to the Federal Reserve and the Wall St. Journal, Texas accounts for forty-five percent of American job creation. Since the beginning of the recovery, Texas has produced thirty-seven percent of net U.S. jobs. USA Today points out that the Texas economy has grown twenty-six percent over the past decade, one of the largest increases of any state economy in the past fifty years. The Texas economy is now second only to California, which is may be entering a period of decline.

What makes Texas’ growth all the more interesting is that in 2009 Perry rejected his state’s share of the federal stimulus money. USA Today reported that Perry rejected the $555 million because of conditions that the federal government placed upon the use of the money, such as an expansion of unemployment insurance. During his tenure as governor, Perry has supported limitations on abortion, reform of medical malpractice laws, and the Trans-Texas Corridor, a large infrastructure project that would have expanded Texas roads, rail and data lines. The plan for the corridor was shelved in 2009 amid public opposition. He has vetoed more bills than any other Texas governor.

Perry has raised eyebrows several times during his career. In 2009, he made comments that were construed to be an endorsement of secession after a Tea Party event. At the event some attendees shouted, “Secede!” Afterward, Perry was quoted by the Austin Statesman as saying, “We've got a great union. There's absolutely no reason to dissolve it. But if Washington continues to thumb their nose at the American people, you know, who knows what might come out of that? But Texas is a very unique place, and we're a pretty independent lot to boot."

The Atlanta Journal political blog has a video of Perry’s speech at the rally, which does not mention secession, and notes that it sounds as if only one or two people shout the word “secede” and then only one time. The blog notes that others laughed and that it seemed that the shout was a joke. In any case, Perry’s comments are hardly a call for Texas to leave the Union.

Perry has also faced criticism for several executions carried out by the State of Texas. This year, Humberto Leal Garcia was executed for the rape and murder of a sixteen-year-old girl. The execution was criticized by the Obama Administration and the International Court of Justice because Garcia was not informed of the right to contact the Mexican consulate at the time of his arrest. Perry received criticism for failing to stop the execution, but the U.S. Supreme Court also ruled against Garcia.

In another case, that of Cameron Todd Willingham in 2004, convicted of the arson murder of his three children, critics accuse Perry of removing three members of the Texas Forensic Science Commission shortly before the commission was to hear a fire expert’s examination of evidence in the fire. Three reports, including the report commissioned by the state, concluded that the evidence did not point to arson.

Perry denied pressuring the investigators and said that the replacements were made because the commissioners’ terms were expiring. He told CNN, “If you've got a whole new investigation going forward, it makes a lot more sense to put the new people in now and let them start the full process, rather than bring people in there for a short period of time and then replace them. I think it makes a whole lot more sense to make a change now than to make a change later."

He also told the Houston Chronicle, “Willingham was a monster. He was a guy who murdered his three children, who tried to beat his wife into an abortion so that he wouldn't have those kids. Person after person has stood up and testified to facts of this case that quite frankly you all aren't covering.”

More recently, Perry has made headlines for his sponsorship of “the Response,” a day of prayer at Reliant Stadium in Houston. The event, which drew some 30,000 attendees as well as Gov. Sam Brownback of Kansas and video message by Gov. Rick Scott of Florida, was billed as a call to repentance for the United States.

The event, which drew criticism from separation of church and state activists and a lawsuit from atheists, was open to people of all faiths, although the attendees were predominantly Christian. The gathering was also not a political rally. According to the N.Y. Times, Perry even offered a prayer for President Obama: “Father, we pray for our president, that you impart your wisdom upon him, that you would guard his family.”

Perry also made headlines in April 2011 when he issued a proclamation asking Texans to pray for rain. Georgia Governor Sonny Perdue hosted a prayer service in 2007 when Georgia was in the clutches of a similar drought. In 2008, Georgia suffered the worst floods in decades. To date, Texas is still wracked by the drought.

Even though Gov. Perry is not a declared candidate yet, there are reports that he is laying the groundwork for his campaign. Peach Pundit reported in June that he had hired Elizabeth Vaughan as a manager of his Georgia campaign. Vaughan was manager of Gary Black’s successful campaign for Georgia Agriculture Secretary and former member of Newt Gingrich’s presidential campaign staff. This report was denied by Vaughan.

Nevertheless, Perry did meet with Georgia Republicans in July according to Politico. According to the report, which did not name the attendees, Perry took part in an “extensive question-and-answer session” in which he talked about the economy and his record of job creation in Texas. Reportedly, Perry won over several of the Georgians who were previously undecided.

Even though he has not yet entered the race, Perry is running a close second to Mitt Romney in the most recent Real Clear Politics average of polls. The most recent Public Policy poll of Georgians’ preferences for a Republican candidate was in April and did not include Perry.

Rick Perry’s economic record in Texas makes him a strong contender if he decides to run for president. He has strong conservative credentials that will please the Tea Party, but the idea of another conservative Republican Texas governor will turn off some voters. Fortunately for Perry, most of those voters probably would probably vote for President Obama regardless of who the Republican candidate is. Perry does run the risk of missing the window of opportunity if he waits too long to enter the race, so look for an announcement of his decision soon.

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Tea Party terror

Last week, in the aftermath of the debt limit compromise, it became fashionable in liberal circles to label conservatives, Republicans, and Tea Party members as terrorists. A common theme among progressives refers to conservatives who are holding the country hostage in order to prevent Democrats from spending their way to an economic recovery.

Representative of many of the progressive musings was a blog on RealClearPolitics.com by Froma Harop. Harop wrote:

“Make no mistake: The tea party Republicans have engaged in economic terrorism against the United States -- threatening to blow up the economy if they don't get what they want. And like the al-Qaida bombers, what they want is delusional: the dream of restoring some fantasy caliphate in which no one pays taxes, while the country is magically protected from foreign attack and the elderly get government-paid hip replacements. Americans are not supposed to negotiate with terrorists, but that's what Obama has been doing.”

Even USA Today, a mainstream newspaper, ran an editorial cartoon in its Friday, August 5 edition which portrays the Tea Party as a Mad Hatter holding President Obama hostage. In the cartoon, President Obama laments that “We now negotiate with terrorists.” The cartoon, which first ran in the Pittsburgh Post-Gazette, can be viewed here.

The terrorist analogies were not limited to columnists and newspaper editorials. According to Politico.com, Vice President Joe Biden allegedly agreed with Rep. Mike Doyle (D-PA) when Doyle said in a closed door meeting “this small group of terrorists have made it impossible to spend any money.” According to the report, Biden responded, “They have acted like terrorists.”

Even President Obama, in his Twitter town hall on July 6, referred to the Republican tactic of linking spending cuts to an increase in the debt limit as “a gun against the heads of the American people.” A video of Obama’s comment is available on Youtube.

The violent imagery, condemned by many of these same progressives as little as six months ago, belies the frustrations of the left in the wake of the Republican takeover of the House of Representatives in 2010 and nearly three years of failed Democratic economic policies. Not only has President Obama and his economic team failed to lead the nation to an economic recovery, they have done so at the cost of increasing the national debt by a third in less than three years. Their failure is capped off by the recent downgrade of U.S. treasury bonds by Standard and Poors.

The terror comparisons also reveal that many progressives do not accept the fact that there are alternate viewpoints that can be held in good faith. In their world, an attempt to cut spending isn’t about reducing the deficit for the good of the country; it is an attempt to “blow up the economy.” On economic issues, much like climate change, once the consensus of liberal elites is reached, any departure from the progressive orthodoxy is to be scorned, ridiculed, and otherwise not taken seriously.

A recent Atlanta Conservative Examiner column that solicited answers from Democrats to a series of questions about Obama Administration policies did not receive a single serious response. Democratic policies are not working. The Democrats realize that they are not working, but they have no other ideas. This makes them angry and causes them to lash out.

In reality, of course, the Tea Party is not a group of terrorists. The Tea Party is made up of average Americans, like the thousands who gathered at the Georgia state capitol in Atlanta on April 15, 2009 to protest the $800 billion stimulus package and corporate bailouts (see a slideshow of this Tea Party here). Various attempts to paint the Tea Party as violent and racist in the past have failed for lack of evidence while tolerant progressives referred to the group’s members by a sexual slur.

The Tea Party is similar to a number of progressive activist groups, except that it is a true grass roots movement of real people who are concerned about the direction of the United States. It spontaneously arose to protest the bipartisan bailouts and out-of-control federal spending. The Republican Party listened to the people. The Democrats did not and they paid the price in the 2010 elections.

True terrorists, whom the progressives seem somewhat less concerned about than the Tea Party, don’t use filibusters and congressional votes to get their way. Their weapons of choice are IEDs, suicide vests, and hijacked airliners. A loss to the terrorists wouldn’t mean a budget compromise; it would mean thousands of dead and maimed victims. The Tea Party is a totally open and decentralized network of groups that even has multiple pages, like this one for the Atlanta Tea Party Patriots, on social networking sites like Facebook. Needless to say, there are no Facebook pages for the Taliban or al Qaeda.

To attempt to label the Tea Party as terrorists demeans the progressives who make the charge, much the same way as it demeans conservatives to call President Obama a socialist. It also detracts from the seriousness of the threat of the actual terrorists, people whose goal is to kill as many Americans as possible and to bring our country to its knees. True terrorism is a life and death matter, not a tempest in a tea pot.

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Barack Obama’s awful, no good, very bad day

Barack Obama has had a bad day. His bad day actually started last Friday when the stock market dropped 500 points on news of Europe’s failure to deal with its own debt crisis. After the close of markets that day, Standard and Poors, one of the rating agencies for financial bonds, made a long feared announcement that it was downgrading the credit rating of the United States. To make matters worse, the U.S. federal debt was revealed to have reached 100 percent of GDP a few days earlier, a milestone not seen since 1947.

Over the weekend, investors and ordinary Americans (who are one and the same if they have a pension, an IRA, or a 401k) contemplated how the downgrade would affect Wall Street and Main Street. To add to the somber mood, on Saturday, August 6, an Afghan insurgent shot down a U.S. Army CH-47 Chinook transport helicopter killing thirty Americans, including members of a U.S. Navy SEAL team. Seven Afghan soldiers and a civilian interpreter were also killed.

There was much speculation as to what would happen when the financial markets around the world opened today, the first trading day after the announcement of the downgrade. What happened was what some observers called a financial “bloodbath.” The stock market crashed for the second time in two trading days. The Dow Jones Industrial Average fell 635 points to a level that erased almost ten months of gains. Financial markets around the world were hit.

At this point, many economists are warning that the United States is likely entering a second recession. In a Dick Morris column, James Fitzgibbon, director of the Highland Fund called today “the second phase of the meltdown.” Fitzgibbon believes that “stocks, real estate will collapse and keep falling into 2013. The lows of 2009 will be easily taken out on the downside.” Chillingly, Fitzgibbon believes that the worst is yet to come: “The real horror will be later in the year when the U.S. Treasury Bond goes into a freefall. Then a depression is possible. Soaring interest rates. Collapsing asset values. Contracting economic activity. Surging unemployment. And business closures.”

This is a particularly bad day for Barack Obama for several reasons. ABC News notes that the selloff sharpened after the president spoke in the afternoon and called for more taxes. This shows that investors have lost faith in President Obama’s vision for the nation. They realize that the fiscal problems of the United States are too great to be fixed by raising taxes on the wealthy. The only solution to the problem of overspending and deficit reduction is to cut spending, a prescription that President Obama and the Democrats have steadfastly resisted.

The second reason that today was a bad day for President Obama is that he must realize that the new crisis is his fault. This is not a crisis that he inherited from George Bush. This one is purely of his own making. The debt crisis is due to the fact that President Obama’s Keynesian stimulus projects have failed miserably while increasing the federal debt by a third. President Obama has no serious plan to repay any of the money that he has borrowed in the name of the American people.

The president must also realize that, as the U.S. economy sinks into another recession, his hopes for re-election also diminish. Voters generally vote their wallets. If times are good economically, they vote for the incumbent. If times are hard, they vote against the incumbent. In a Gallup poll taken before the recent stock market crashes, President Obama’s approval rating was down to 43 percent (with 48 percent disapproving). With the bad economic news, his approval rating will only fall further.

This is not altogether unfair. The current carnage in the world’s financial markets is the logical end result of his policies. His administration has been an unending saga of new regulations on business, not the least of which is Obamacare, that stifle job growth. His solution to the first economic crisis was to borrow money and spend it on pet projects. An additional attempt to resolve the crisis was to print more money through the Federal Reserve’s quantitative easing programs. As a result, the United States has the highest unemployment in recent history, a downgraded credit rating, and a devalued dollar, all due to President Obama.

In Georgia, the unemployment rate is even higher than the national average. According to the Georgia Department of Labor, Georgia’s unemployment rate is at 9.9 percent while the national rate is 9.2 percent. Three years after the initial crash of 2008, Georgia’s foreclosure rate remains the sixth highest in the nation according to the Atlanta Business Chronicle. This has led to falling tax revenues for the state and local governments, which has in turn led to massive layoffs of government workers and teachers. Untold numbers of Georgia businesses have failed. Georgians have watched their retirement plans dwindle year after year. After the events of the past few days, it seems that all of this will get worse. Barack Obama lost Georgia by five percent of the vote in 2008. He will likely lose by much more in 2012.

The last bad thing that happened to Barack Obama today is that Timothy Geithner informed the president that he would not resign as secretary of the treasury. As one of President Obama’s most trusted economic advisors, Geithner bears much of the responsibility for the current economic fiasco. Federal Reserve Chairman Ben Bernanke and Austan Goolsbee, chairman of the president’s Council of Economic Advisors, are also reportedly not resigning.

It is a bad day for President Obama. Unless he reverses his economic course, a change that he is most likely incapable of making, he will go down in history as a latter-day Herbert Hoover. He will be the president who spent the United States into an economic calamity, the likes of which has not been seen in eighty years. That is bad for President Obama, but worse for the rest of us.

If you disagree with the analysis presented in this article, please read “Serious questions for liberals, Democrats, and other Obama supporters.” If you can answer the questions presented, the author would welcome your response, either through email at thorntondavid@yahoo.com or as a comment.

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What the downgrade of federal debt means to you

When the world financial markets open today, it will be the first chance that they have had to react to the news of the downgraded U.S. debt. The announcement of the downgrade by Standard and Poors came last Friday after the close of the markets on a day that had already seen a huge decline in stock markets around the world.

As Georgians learned in 2008, what happens on Wall Street and Washington affects lives in Georgia. The financial crisis that began in New York’s banks and investment houses froze credit in Atlanta and caused the local real estate market to crash. Next, new construction projects stalled and Georgia’s unemployment rate skyrocketed as the effects of the deepening recession spread throughout the state and the country.

The current crisis is different from 2008 in many ways. The debt crisis has been long in coming and was not unexpected. For over a year, rating agencies have warned that a downgrade of U.S. debt was possible if the government did not take steps to reduce borrowing and deficit spending. With the recent debt limit crisis, many investors had already included concerns about the national economy in the value of their investments.

Adding to the seriousness of the new crisis is that, in a flurry of borrowing after congress raised the debt limit, the federal debt exceeded the gross domestic product (GDP) of the entire country. Last Wednesday, August 3, the treasury borrowed $238 billion which put the national debt at over 100 percent of GDP. The last time that the national debt exceeded GDP was in 1947 as the country demobilized after World War II according to Yahoo News.

This will undoubtedly be a volatile day of trading around the world as many investors panic and sell. The fact that the downgrade occurred on a weekend and investors have had two days to calm down may temper some of the trades.

The twin shocks to the market will likely cause more long-term economic damage. As Martin Feldstein, former chairman of President Reagan’s Council of Economic Advisors, recently pointed out in the Wall Street Journal, the Obama Administration’s policies of spending borrowed money and devaluing the dollar have led to the slow growth in GDP. Employment is closely related to GDP. If the economy is not growing, jobs are not being created, and it is difficult for the unemployed to find work.

The Wall Street Journal points out that different commodities may be affected in different ways. Copper, which is used in many products, is considered a bellwether for the economy and is already down eight percent in the past week. This signals fears of a second dip in the recession. Because oil prices often rise and fall with the larger economy, if investors believe another economic downturn is likely oil prices may fall. This could translate into cheaper gas prices for Georgia drivers and lower energy costs. On the other hand, gold prices often rise in times of economic uncertainty. Gold may be driven higher as the debt continues to increase and the dollar continues to weaken. Gold is already trading near record highs.

Another likely effect of the downgrade is a rise in interest rates. For the past few years, the Federal Reserve has kept interest rates low in an attempt to jumpstart the economy. The downgrade means that rating agencies feel that U.S. treasury bonds are more risky due to the increasing federal debt. Since the bonds are more risky, investors are likely to want more interest for loaning money to the federal government (i.e. buying treasury bonds).

According to the Center on Budget and Policy Priorities, six percent of the federal budget is currently spent on interest. If the government has to pay more interest that percentage will grow. If more money goes to interest that means that less money will be available for spending on other programs. This will exacerbate the federal spending crisis.

Adding to the uncertainty is the fact that U.S. treasury bonds are probably still the safest investment in the world, even after being downgraded. This is not so much an endorsement of U.S. treasury bonds as an indictment of the economic status of the rest of the world. The U.S. is broke and dealing with out-of-control spending, but it is still in better shape than Greece, Spain, France, Italy and many other nations around the world. This may mute the effect of the downgrade.

Although no one knows for sure what will happen, the downgrade likely means that the unemployment rates in Georgia and the United States will remain high. Rising interest rates will mean that mortgages and other loans will be more expensive. As interest rates rise on adjustable rate mortgages, there may be more foreclosures. The upward pressure on interest rates will prevent a recovery in Atlanta’s real estate market, which has been hard hit by the recession.

As the borrow-and-spend situation eventually becomes untenable, the federal government will likely be forced to adopt austere spending cuts like those of Greece. This will eventually mean that benefits in the big entitlement programs, Social Security, Medicare and Medicaid, have to be cut. These cuts will affect millions of the poorest Georgians. Other payments from the federal government to the states, such as highway funds, may also be reduced or eliminated.

The United States has reached a point where it is obvious that the federal government must cut spending. As the price of borrowing increases, interest and debt repayment will become ever larger shares of the federal budget. As the economy falters, tax revenues will fall and make the problem even worse. The only solution is to reduce spending without raising taxes, which would also send the economy back into a recession.

 

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Serious questions for Democrats, liberals and other Obama supporters

As President Obama’s first and possibly only term begins to draw to a close, it is fitting to look back over the past three years and evaluate his performance. President Obama began with an ambitious reform agenda that included leading the nation out of the Great Recession, enacting what became his signature piece of legislation, the Affordable Care Act, and changing the image of America abroad, in part by closing the detainment facility for terrorists at Guantanamo and withdrawing from Iraq.

Some of these goals have been accomplished while others obviously have not. In the case of the accomplished goals, often the result has been far from what the president intended. There are several questions that we must consider in light of the past three years.

First, given that Democrats began President Obama’s term with strong majorities in both houses of congress and were able to pass whatever legislation they wanted over ineffective Republican attempts at filibusters, how do liberals explain the abject failure of their multiple Keynesian stimulus laws to recover the economy? Recent statistics show that the U.S. economy has experienced virtually no growth over the past two quarters and unemployment remains above nine percent. In Georgia, unemployment remains at 9.9 percent, almost a full percentage point above the national average, according to Georgia Department of Labor. The recovery is proving to be an illusion.

Second, how do we resolve the problem of the federal debt? The federal debt has increased markedly from 2008 to 2011. The increase is even more stark when examined in terms of control of Congress rather than the presidency. Since 2006 when Democrats gained control of both the Senate and the House of Representatives, the debt has grown from $8.68 trillion to $14.34 trillion according to data from treasurydirect.gov. This is a 65 percent increase in the federal debt over a five year period.

In budget debates so far this year, Democrats have resisted virtually all attempts to cut federal spending. The recent debt limit compromise brought the government to edge of default to enact a measly five percent in spending cuts. Vastly larger cuts will be needed since federal spending will still outpace tax revenues by a large margin. America’s future will be like that of Greece and the other European basket-cases if we continue along the path toward a European-style social democracy.

Under Keynesian theory, government theory can provide a boost to the economy. Alternatively, when the stimulus spending is removed, the economy must necessarily contract. When do liberals and Democrats believe that it is ever proper and beneficial to reduce spending or are we doomed to ever-increasing budgets in order to prevent another recession or depression?

Third, what do liberals suggest for a foreign policy since President Obama’s theories of engagement have failed? Polls show that the U.S. is even less popular in the Arab world under President Obama than under President Bush, a remarkable feat in itself. Far from giving up its nuclear program, Iran is stepping up enrichment of uranium and growing ever closer to a nuclear weapon. Such a weapon could target Atlanta if launched from a cargo ship just beyond Savannah’s territorial waters. Further, President Obama’s engagement of dictators just as Libya’s Gadhafi, Syria’s Assad, and Iran’s Ahmadinejad have not stopped them from ruthlessly cracking down on democracy protests. Russia’s Putin and Medvedev and Venezuela’s Chavez have also expanded their power under Obama’s tenure.

The Atlanta Conservative Examiner would welcome a serious response from liberals and Democrats in answer to these questions. Please leave your answers in a comment below or email them to the address listed in the author’s profile. The definition of insanity is said to be doing the same thing over and over while expecting a different result. Regardless of party affiliation we should examine the mistakes of the past and open a dialogue on how to avoid making similar mistakes in the future.

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