The Government Budget Problem Explained

A fellow bridge player asked me about the state funding problem for the University of Wisconsin System and we said to solve the problem the state will need to go where the money is. The number of college age students is going down and trying to solve that by eliminating a couple of tiny two-year campuses is like trying to save the Titanic (the ship, not the movie) with a teaspoon. Something like four-year campus needs to go. Warming to our subject, we said the same is true for the federal government where you need to go after entitlements. Our interlocutor, being a good leftist, said what about defense. The point is that everybody wants to cut government spending but precious few are successful.

As evidence of what you should cut go to The Dispatch and read Scott Lincicome’s post: The Farm Bill Is A Case Study In What’s Wrong With Washington. Scott’s posts are worth more than the price of a subscription. The GOP is trying to end the Department Of Education. We are going short on the success of reducing either the farm bill or the DOE. Why? Here is Jim Geraghty from NRO’s Morning Jolt (paragraph break deleted):

Believe it or not, a federal agency — well, technically a standing advisory committee — is actually shutting down for good. Ryan Young, a senior economist at the Competitive Enterprise Institute, notes that the U.S. federal government’s Board of Tea Experts — no, that is not made up or from The Weed Agency [A MUST READ] — is formally ceasing to exist, in response to the Federal Tea Tasters Repeal Act of 1996. The board “was responsible for making recommendations to the Secretary of the Treasury to fix and establish uniform standards of purity, quality, and fitness for consumption of all kinds of teas imported into the United States.” Young notes the closure “only took 27 years!”

Everyone should read Jim’s The Weed Agency to realize how difficult those successes are. The link to Ryan is just a tweet (or an Xeet?) so there aren’t any details. We shouldn’t dismiss those small successes but they are incredibly difficult and require Congress critters to be focused on finding ways to cut the budget. Most are not focused on cuts and that is the problem. Budget cuts are in the would be nice category that rarely get accomplished.

Oil And Democrats

Government intervention almost always leads to problems as the government tends to be the most inflexible organization. It is why economic freedom leads to prosperity and the other route is the road to serfdom. Today we consider the new administration and their actions on oil and gas.

As we say in bridge, “Let’s review the bidding.” We’re not suggesting our list is comprehensive as it is just what our imperfect brain remembers about the Democrats and oil during the current administration. On his first day in office The Frontrunner killed the Keystone XL pipeline project. At best we could say he didn‘t oppose the Russian Nord Stream 2 pipeline. In Robert Zubrin’s words at NRO [The Frontrunner] Moves To Wreck US Oil Industry. You should read Robert’s post in full. The gist is that regulations on natural gas will require a pipeline that the regulators will not allow and that will restrict US oil production. You don’t need a link to know that gas prices are up. And to belabor the obvious, the price of crude oil is up so Russia, OPEC, and Iran are all very happy. The Frontrunner is begging OPEC and Russia to pump more oil. They said no.

Sidebar: (Alert for a sarcastic section) The Donald is lucky he didn’t do any of these things. As you may remember, folks were close to if not accusing him of treason with Russia. Everyone of these actions by the new administration helps Russia and other enemies or frenemies of the US while damaging the US. Even in our sarcastic section we are not going to accuse The Frontrunner of treason but what The Donald did was the opposite of treason. Oil and Russia was one of the times where he lived up to his MAGA slogan. We wish there were more of them. End Sidebar and sarcastic section.

Now the topper is that The Frontrunner has asked the FTC to investigate oil companies for illegal conduct. Remember, the sarcastic section is over. Karen Townsend (we love the name) is one of many to have the story. Here is part of her quote from The Frontrunner’s letter to the FTC:

“The Federal Trade Commission has authority to consider whether illegal conduct is costing families at the pump. I believe you should do so immediately,” 

As Dave Barry often says, “We are not making this up.” It is hard to see any plan here. We’ve thrown out treason because, in part, treason would be done in secret. These actions by the new administration are all headlines. What does that leave us in evaluating oil and the Democrats? Our take is that it is ignorance of economics and particularly the hubris that comes from ignorance of knowledge problem exacerbated by a lack of leadership. So when The Frontrunner kills Keystone to fulfill a campaign promise to some supporters he and the Democrats know it going to cause economic problems but have the hubris to think: “We’re in charge. We can fix it later.” Perhaps his inaction on Nord Stream 2 was part of the plan. Real life, however, is a multi-player game and giving the Russians a few berries isn’t going to make them your buddy. We hope that it stops getting worse but we really can’t be sanguine about the possibility.

It is true that there are Keep It In The Ground crazies on the left but we don’t think that The Frontrunner or the rest of the Democrat leadership is there. It is just when they feed the crazies a few berries the things they do to offset previous actions just end up making it worse. Now we have three more years to ride out.

Stop Political Failure

Our favorite graduate school paper was the Civil War as a political failure. Our argument was that both sides had estimates of the cost of the Civil War. They were ridiculously low compared to the actual cost but we found them. With that amount of money you could end slavery in a gradual manner by freeing slaves at birth and death. Instead we had the Civil War and paid many times the estimated price and suffered over 600,000 dead. It could have been avoided by political processes.

We don’t expect a civil war now but the similarity we see between then and now is a failure to compromise. There are all sorts of deals out there that could make sense to the left and the right. We have suggested a climate change deal that would include eliminating the gas tax and replacing it with a carbon tax. Kevin D. Williamson at NRO has a bigger deal:

In a less poisoned political climate, there would be fruitful opportunities here for genuine bipartisan cooperation. Progressives say they want lower greenhouse-gas emissions and big infrastructure investments. Conservatives want infrastructure projects, too — including new pipelines — and like the idea of a heavy-industry economy sustained by cheap and plentiful labor. Everybody says they want more manufacturing jobs and the high wages that go with them. … There are some good responses to all that: Build the nuclear power plants, build the pipelines, free the ports and open up our internal trade lanes, produce the hydrogen, be the country that builds the hydrogen-powered ships and trains.

He notes that trains are a throw-in for progressives. Yes, you should read everything Kevin writes including his newsletter The Tuesday. We need a less poisoned political climate. Instead we have the right is promising to ban Critical Race Theory (CRT) and the Democrats want a wealth tax or a tax on unrealized capital gains to pay for their dreams of winning big by providing new entitlements to the middle and upper classes while alleging that they are punishing the rich.

Sidebar: We are strongly critical of CRT and think it should get the same coverage in K-12 that Intelligent Design does. Banning CRT makes it seem more reasonable and causes freedom of speech concerns. End Sidebar.

We know that rhetoric is important and powerful. The problem is that the politicians seem to be the ones taking their own rhetoric seriously. Now is a chance for Joe, Krysten, Mitt, and those folks in the middle to make history by just doing what politicians should do. Let’s Make A Deal. Our retiring Congress Critter: This is your chance to leave in glory. Our advice is to start small to get the ball rolling. We would suggest the carbon tax gambit. A small success could lead to a big one like Kevin suggests.

Fixing Our Financial State

Kevin D. Williamson correctly laments the problems of our political parties in his NRO The Non-Debate On Taxes. We love his flippancy and he has a great ending:

Fox News and MSNBC, Bongino and Ocasio-Cortez, Proud Boys and Antifa, American Greatness and people who huff Scotchgard at breakfast instead of paint fumes — it’s the pop-politics Battle of Stalingrad, and the only sensible thing to do is to cheer for casualties.

And it is great fun but at some point, as Kevin D. has often written, we will have to get serious. If you don’t think they are already insolvent, Forbes tells us Social Security goes there in 2033 and Medicare A in 2026. And then there is the deficit. And then there is the future deficit. In the fullness of time, as bridge commentators like to say, something will have to be done about reducing spending, increasing taxes, or both. We will probably need a number of political casualties (just to be absolutely clear: a political casualty is when somebody loses and election) to get there but we need to get there soon.

Kevin D’s non-debate needs to end and we need a real debate with compromise from both sides. We know, compromise is not going to start today, this week or this year but as the political casualties start building up then we will get there eventually.

Let’s start small: What reductions in “green” crony capitalism would the left accept for a modest carbon tax that replaces the gas tax. We think dollar for dollar is the minimum. For the right the question is how high is modest? Would you accept a carbon tax that is higher than the current gas tax? How much?

What we don’t want is specific taxes on either old sins or new sins. We don’t want tariffs, taxes on airplane tickets, or alcohol. We would listen to a proposal to eliminate all tariffs in return for a VAT. Taxes need to be general: carbon, income, VAT.

Social Security (SS) is a big money opportunity. We often don’t understand the left and we are particularly perplexed as to why they don’t want to save SS. Individual investment accounts would be the best solution but the financial condition of the country and the cash flow timing of switching from SS to investments rule out that option. So the practical option for the right is to support is means testing. The left wants to tax the rich but not too much as they do vote Democrat. We really don’t understand why it doesn’t make the left happy by taking away prospective benefits from the rich with means testing SS but it doesn’t. Are you willing to move up the SS limit or add a tenth of a percent to the SS tax rate to get means testing for SS?

Medicare is another big money opportunity. Currently, we can’t see the opportunity there because neither side seems to have much for ideas on health care.

The Donald and the GOP finally got US corporate taxes at a reasonable level. We are not willing to compromise on corporate taxes unless the rate goes down. For example, we would be willing to reduce specific energy tax incentives in return for a lower rate. Or we would consider increasing rates on dividends and capital gains for a lower or, even better, zero corporate tax rate.

The biggest opportunity is individual income taxes.

Sidebar: Our favored solution is to replace much of the individual income tax with a VAT and start individual taxes at say, $100,000 but we don’t see that happening now but 2024 is a political eternity from now. Here is the 2015 plan that we think is an interesting start. The small step to move in that direction would be to increase the standard deduction for higher marginal rates. It is a tough sell because the Democrats, on average, get itemized deductions so they don’t benefit from raising the standard deduction. If it did happen we would consider raising taxes in return for actual spending cuts. End Sidebar.

So what are the realistic opportunities for raising individual taxes? The left wants to raise taxes except for eliminating the state and local tax deduction which hurts their biggest supporters, the rich who are mostly in areas with high state and local taxes. The right has at least lukewarm interest in cutting spending. The problem is spending cuts rarely materialize because the biggest cuts are in the future and future Congresses can undo what past Congresses have done. What needs to happen is cutting out a program because programs are really hard to stop but almost equally hard to start. Jim Geraghty’s great book is fiction but it rings so true. We don’t have the detailed knowledge of the federal government to know which program to cut but somebody does.

Of course, the choices listed above are not the only opportunities to improve the financial condition of the US. What we need to do is find out what proposals would be acceptable to enough partisans on both sides. Ending the non-debate on taxes and spending is what we need.

Accepting Election Results

Jim Geraghty has a great Jolt yesterday at NRO entitled How Our Political Parties Stopped Accepting Each Other’s Victories.” Yes, you should read the whole thing. Twice. And you might want to bookmark it for future discussions. While you are at it subscribe to the Jolt and the National Review.

This is a great Jolt by Jim because it has detail and precision applied to both parties. Much of what we read and almost all of what we stop reading lacks both detail and precision and just gives us generalities that might be more often true than false but are easily falsified.

So you have read it all and you are part of the GOP/right/conservative then what are the implications? Jim has made the point that the biggest problem is that election and procedural (like impeachment) complaints come from PARTY representatives and often those at the top of the party hierarchy. In the past party leadership kept plausible deniability by leaving the accusations to other folks associated with their side of the aisle. We agree with Jim that it has changed and think he could have gone back to earlier Supreme Court nominations and the behavior of Joe Biden and others but we are sure he has a word limit for The Morning Jolt.

It is true but uninteresting that they (Democrat/left/progressive) started it. It didn’t work with your parents and isn’t going to work now. What is also true is that they (D/l/p) also control the media. So behaving like Democrats over past results is not a winning strategy as the Georgia Senate races showed. What makes sense is continuing to work for ballot integrity while accepting past results. The time to act like Democrats is when they attack ballot integrity.

A Question Of Style

We don’t have an extensive style book. In fact, it is not written down anywhere. We use we to describe ourselves, have a few nicknames like The Donald and Triple A, and use Democrat Party to describe the party on the left. It seems our style has become a matter of controversy. Red State’s Mike Miller’s extensive title is a bit garbled but explains it pretty well: The AP Is NOT Happy With the ‘Label,’ ‘Democrat Party,’ Conservatives, and It Couldn’t Be More ROFL Whiny About It. You should read it all to get the Always The Donald perspective on the Democrat Party moniker dust-up.

Sidebar: At first we thought ROLF was a competitor to the NFL but it is not. It is an acronym for: Rolling On the Floor Laughing. We don’t know why “the” gets left out of the acronym and “on” is in. End Sidebar.

We take a longer view than Mike. Democrat Party is a mild jibe. It is like calling your siblings by a childhood names rather than their adult names. It is way kinder than the 44th president saying R (as in Republican) stands for reverse and D (as in Democrat) for drive. That was nasty but might just fit in the acceptable range. It is off the charts kinder than tea-baggers, the sexual slur Tea Party members were subjected to by the media and others. That was clearly unacceptable.

Part of good politics is the art of mild jibes. We need to encourage those so that the nasty and unenlightening comments like fascist, Hitler, socialist, and McCarthy to name a few stay out of our discussion. We are unmoved by the complaints and are sticking with our style, Democrat Party it is on Men With Gloves.

Competition In Municipal Elections

Competition is good for consumers. We mostly think about that in economic terms but many have pointed out it is true in politics as well. David French at the Dispatch is the latest to make this point in There Is A Blue Ocean Of Possibility For A Reasonable GOP. He starts off with this paragraph.

If you’ve heard it once, you’ve heard it a thousand times—a nation needs a healthy political opposition. I’ll go further. A state needs a healthy opposition. A city needs a healthy opposition. And the most basic definition of a healthy opposition is a political party that 1) exists and 2) is fundamentally grounded in reason and evidence.

Let’s take it sentence by sentence. Sentence one: yes. Sentence two: No you are not going further than the other folks who have discussed this. Sentence three and four are obviously correct. Sentence five he has already divided up into two criteria. Existence is sorta obvious. Part two is simply wrong.

Neither of the major parties in the US meet the second criteria and it seems unlikely that any political party anywhere meets that criteria. Political parties are about many things like obtaining power and economic rents but they are not grounded in reason and evidence. We can prove it with a single question: How many current Congress critters are atheists? According to Wikipedia the answer is one, Jared Huffman who didn’t let the cat out of the bag until his third term. Wikipedia also tells us that the late Pete Stark was the first openly atheistic Congress critter. Barney Frank was also an atheists but when Kevin D. Williamson discusses Barney’s support of Hugo Chavez he notes that Barney was an acquired taste:

 Barney Frank at one point had a bisexual prostitution ring being run out of his home but was never charged with any crime.

(My main objection to Representative Frank’s taking the gavel as chairman of the House Financial Services Committee was that he had somehow managed to lose money hosting a whorehouse in Washington.)

So to become a candidate for Congress from either US party you need to have specific beliefs about the supernatural. It is one of many examples that political parties are not fundamentally grounded in reason and evidence. It not that candidates don’t have reason and evidence about their campaigns. It is not that there is not a patina of reason and evidence in their rationale for their positions. To use an old marketing cliche, candidates are elected for the sizzle not the steak.

We agree that many municipalities would be better served with political competition. We encourage the GOP and the Democrats to compete everywhere. The first step is not to try to reason with these voters but to find issues and themes that resonate with them. We agree with David that education is a great opening. We also think that supporting Uber and related organizations would be a good idea but we reasoned to our conclusion. The candidates need to find their groove.

Predictions For 2021

So why do we publish our predictions on the first day of 2021 when everyone else seems to publish them at the end of 2020? It is our site so we can do it when we want but today seems like the right day for us. So here are nine general and personal predictions. Yes, there will be measurement problems evaluating most of these predictions (other than three, six, and seven) at the end of the year.

First, it is going to be a bad year for colleges and universities. We exclude technical colleges and community colleges because there will be a renewed interest in technical skills and their funding is different. Only a few private schools like Harvard have an enormous endowment ($41.9 billion) to get them through these troubled times. The rest of the private schools and the public schools will see troubled times. Many small schools will disappear. The states need to start on budgets fairly soon so the budget problems will be on display this spring. Some states will take drastic action.

Second, The Frontrunner is not going to unify the country. Press bias will not let up so The Frontrunner will get glowing reviews but the right, in large part, will not submit. Unlike the last four years, those folks that do not submit will not be glorified. Why do we think there will be a lack of unity? Because of the attitudes on the left and right. The Unherd is where we go to try and find serious folks on the left. Here is what one said about Republicans with The Donald gone:

Republicans can drop the balancing act and go back to satisfying the party’s donor base with cheap labour [he is British], austerity policies, foreign military adventures and the distraction of permanent culture war.

The attitude on the right is not much better. We don’t see The Frontrunner bridging the chasm. A carbon tax enacted with bipartisan support would be evidence we were wrong.

Third, we are going to play less duplicate bridge this year. We will tell you about our successes and failures in a week when the results are out. We figure we spent over 1,000 hours just playing bridge in 2020. Add to it preparations, study, and post-mortem and it was a full-time job. An astute investor would have bought Bridge Base Online in March. Yes, we know the last sentence is not a prediction.

Fourth, the rift on the right is not going to get better this year. We, like Julius Caesar analyzing Gaul, think you can understand the rift by dividing the right in three parts: Those who voted for The Donald in the primary (and general) election, those, like us, who only voted for The Donald in the general election, and never-The-Donald (NTD) crowd. The Donald’s loss makes the NTD much more of a target. It means that GOP primary voters may make a choice like Josh Hawley in 2024 that makes The Donald look good.

Fifth, nothing will happen on entitlements. This is a mixed prediction. The good news is that the Democrats won’t create a new one. The bad news is that he existing federal entitlements will continue to slip towards the abyss. The longer we wait the more expensive the fix gets.

Sixth, we are looking for a comeback for the Red Sox and Patriots in 2021. We don’t expect any trophies but we expect them to be winning teams. We don’t expect much from Arsenal in the 2020-21 season other than avoiding the ignominy of relegation. The 2021-22 season is a bit far away but that should be better.

Seventh, we think The Frontrunner will be president a year from now. Lots of people on the right don’t agree but the Democrats will be the group to take him out. The GOP is not excited about Triple A becoming president. We don’t think that will happen until an election year. Even then the chances are 50-50.

Eighth, the American economy will continue to roar back from COVID-19. The Frontrunner’s signature will be on lots of executive orders to attempt to stifle it but it has too much momentum to stop it in 2021.

Ninth, we will get to hug our grandchildren sometime in 2021. We saved the most important for last.

Let’s Make A Political Deal!

Well, of course we can’t make one now other than the almost 5,600 pages that gives money to almost everybody. That’s not really a political deal. It is just borrowing money to give it to folks. Today, almost everybody is in favor of that. A real political deal is give and take. Political deals are off until after the Georgia elections for the Senate because both sides need to get the base revved up. Congress is closing up shop anyways so we have no choice other than to wait.

Holman W. Jenkins Jr. wrote in the WSJ about the Biden appointments on climate related positions. He says that they are reliable:

They can be trusted not to say that electric cars are a distraction and bauble for the upper middle classes, that nuclear power is essential, that heavy-handed regulation will kill more jobs than it creates, that a carbon tax would be a far more efficient way to discourage emissions than the green socialism Democrats have embraced. [Emphasis added]

Make sure you understand that the not in bold applies to everything on Holman’s list. Our idea, and we have put it forth before, is that the GOP needs to make an offer on a carbon tax in order to try and peel away the moderate Democrats from the woke folk. Another way to put it is to try and identify if there are any moderate Democrats to deal with.

A carbon tax is not going to be a rousing success with the GOP base. It did not go well in Australia. It will resonate with the Democrat base although it will not be punitive enough for many. It will make elected Democrats happy if there will be more tax revenue. The GOP is taking the big chance. What will they get in return? Our initial position would be the elimination of all federal energy subsidies and requirements. Most of these will be subsidies for “alternative” energy. As Mick sang, “You can’t always get what you want But if you try sometime you find You get what you need” to perhaps make a political deal.

A proposal like this would give the GOP the fairness card to play. It would give any moderate Democrats a chance to prove it. The argument is that market is currently biased because energy sources like oil and gas don’t have to pay the full cost for carbon emissions. As Holman points out it can be hard to evaluate the carbon effect of alternative energy systems that cause us to build all those batteries. A carbon tax would reduce the bias and make markets even better.

One problem is trying to find a reasonable carbon tax. As Holman notes there are wildly different models that would generate wildly different taxes. The current federal gas tax (FGT), which would be eliminated in the deal, is 18.4 cents per gallon. An equal carbon tax or 1.0 FGT should be the limit. A carbon tax of substantially less than 1.0 FGT would raise an equal amount of revenue. One thing we know from the Australia misadventure is that a schedule of tax increases is a bad idea. We are willing to agree to a revenue positive carbon tax, i.e., the carbon tax raises more in total than FGT, but the limit on the rate would be 1.0 FGT. If you go revenue positive then you might give money back to the poor because a carbon tax is likely to be regressive just like the FGT.

So that is the rough outline of the deal. Eliminate the federal gas tax, enact a similar carbon tax without escalation clauses, and reduce energy subsidies. Once we know who is in the Senate we can get to work. Well, you can get to work. We are retired.

Helping Cities

A recent National Review cover story (Blue Today, Bluer Tomorrow on NRO), by Joel Kotkin discusses the continued failure of progressive policies in big cities and states controlled by progressives. Of course you should read the whole thing. We agree with Joel that progressive failure should provide opportunities for conservatives, the GOP, and the right to help themselves and their new constituents. Joel sets the stage by telling us about progressive or “blue” policies:

Many core constituencies associated with blue politics may become aware that their interests, prominent on the progressive menu, will never in reality be served. Ultimately, results, not memes, matter most. Progressives have demonstrated monumental incompetence in addressing everything from social equity to education, culture, and energy policy. Even in postmodern America, failure cannot forever be sold as success.

You are going to read the whole thing so we will tell you briefly that Joel gives data about various minorities and about the various political groups. According to Joel’s sources we can break the electorate into three pieces:

As Teixeira argues, the woke agenda lacks a large electoral constituency. Conservative traditionalists are also a minority, representing barely 25 percent of Americans, according to the recent Hidden Tribes survey; woke progressives constitute only one-third that percentage, or just over 8 percent. The survey describes roughly two-thirds of Americans as “the exhausted majority.” 

He recognizes that conservatives/the GOP/the right will have a hard time getting support from the exhausted majority. We agree with Joel on the challenge but we want to disagree with his odd bogeyman. Joel says that the GOP faces challenges and give us examples:

Some conservative market fundamentalists, like progressives, favor the eradication of single-family neighborhoods. Others recoil from trade policies that violate free-trade principles, even when hewing to those principles threatens the livelihoods of both middle-income households and, even more, the downwardly mobile working class. 

We rarely run across part of a paragraph with as much to disagree with. To start with we really don’t like “conservative market fundamentalists” as a term to describe folks like us. Free marketers or capitalists will do but we like capitalistic orphans because we are capitalists but the conservative movement gives us lip service when we are particularly lucky. What is even stranger is that he has picked on a tiny portion of the conservative movement that is completely out of power. If we are going to stick to whole numbers then capitalistic orphans are either one or zero percent of the conservative movement.

Then he tells us, without a reference, that capitalistic orphans support the eradication of single-family neighborhoods. If the capitalistic orphans came out against single-family neighborhoods then we missed that meeting. We are market driven so Joel must think that the markets will eliminate such neighborhoods. We don’t know why.

Tariffs seem an odd topic for state and city governments because they are set by the federal government. Yes, us capitalistic orphans do recoil from trade policies that violate free-trade principles. Zero is the best tariff. We completely disagree with Joel suggestion that higher taxes like tariffs are good for middle-income or (and this is a really strange term) the downwardly mobile working classes. Tariffs fall mostly on those folks because they are a regressive tax. They benefit only a few. What Joel hopes, like most everyone else, is that the strategy of taking a little from lots of folks and giving a big benefit to a few will make the few happy and the many won’t notice it. We wish it were less successful.

We understand as almost every political platform has foolish economics in it. The Donald is going to win trade wars. The Frontrunner is going raise the minimum wage and tax the rich.

Sidebar: We should remind you to vote for The Donald as he, unlike The Frontrunner, has some economic policies that are not foolish. End Sidebar.

So we would pick something else other than tariffs for the GOP to sell to the electorate in big cities and other progressive enclaves. As a capitalistic orphan we would sell markets. Markets for schools would be an excellent place to start.

Joel is right that progressive policies have failed and the GOP should fight for the future of big cities. Progressives have fooled that electorate for decades. Conservatives and the GOP need to work at appealing to those folks. These cities need and deserve a competition of ideas.