Capitalism Claims Another Victim

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A few years ago I invented something called the Atlas Shrugged Scale. It’s a way of estimating how close reality comes to the satire in Ayn Rand’s Atlas Shrugged.

Some may recall the time when the novel’s portrayal of bureaucrats, social activists, government enforcers, and crony capitalists was denounced as impossibly far-fetched, as just downright pigheadedly mean. We don’t hear much talk like that anymore.

The reason is that every day brings us real-life stories that seem to be written by Ayn Rand, still satirizing from the Next World.

The moral that friends of the college take home with them is that the college was a victim of the capitalist system.

Here’s one. A college is started by a dissident professor who thinks it’s a good thing for faculty to be scared by their students. He puts his college in an economically depressed town where lots of people have time and government benefits on their hands. It apparently admits everyone who wants to enroll, and to have no required courses. There are no grades. Yet in 40 years it manages to enroll at most 200 people at a time. When the college wants to establish a “cultural exchange” with another institution, it chooses the University of Havana. Vaunted college accreditors vouch for the place.

The annual budget of this college is around $20,000 per student, a hefty sum for a place that barely exists. But its president, who seems to owe her appointment to the fact that she is married to a congressman who is a former mayor of the town (and a future US senator), borrows millions of dollars to expand the campus, assuring lenders that there is plenty of money coming in. The money doesn’t come in, although the president has no problem collecting her large salary. Finally she is prevailed upon to resign. Her successor is persuaded to resign by a student mob. Two years after that, the college collapses and ceases to exist. The moral that friends of the college take home with them is that the college was a victim of . . . the capitalist system.

The story is well summarized here. The institution is Burlington College. Its former president is Jane Sanders, wife of Bernie Sanders. The story’s score on the Atlas Shrugged Scale is 9.

Don’t ask me what events would justify a 10. I’m not sure we can take that much satire.




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The Smartest Girl I Know

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When I first met Deja and Zhane, they were living with their mother in a Section 8 housing unit in Yonkers, New York. Their mother was what most people would describe as a “typical welfare mom” — she got a job once in a while, although the risk of losing her benefits if the job didn’t work out made it difficult to get off welfare. But she was proud of those girls! They didn’t go out on school nights, studied hard, stayed away from boys and drugs, and won numerous school awards. When Zhane was offered the opportunity to attend a scholastic camp during the summer, her mother hustled to contact everyone she knew who might be willing to sponsor the girl with a donation of $20, $10, even $5 if they could spare it. I was one of the hustled. More than once. And I was happy to help.

I lost track of the girls when they stopped attending our church, but I ran into Deja recently at the grocery store in my middle-class neighborhood north of Yonkers, where she is working as a clerk and saving money for college. She also works at a Burger King in the evenings, but she enjoys her grocery job better. “I like the customers, and I feel like ‘somebody’ here,” she said. I asked about her sister, and we caught up.

An estimated 40 million Americans are saddled with outstanding student loans totaling over a trillion dollars.

Zhane is also working two jobs, trying to earn enough money to pay off the debts she accrued after one year of college. “She didn’t want to owe all that money,” Deja told me, “so she’s working to pay it off before she goes back to college.”

Smart girl.

According to statistics compiled by the Federal Reserve Bank and the Chronicle of Higher Education, an estimated 40 million Americans are saddled with outstanding student loans totaling over a trillion dollars. Many of them are well into middle age now, with little hope of ever paying off their debt. In fact, student loans are the only debt that cannot be discharged through bankruptcy, and if the loans aren’t paid off by age 65, when Social Security kicks in, payments to Sallie Mae will be deducted off the top. So add student loans to the inevitability of death and taxes — and don’t plan to leave that fancy engagement ring to your heirs, because Sallie Mae will be first in line when your will is probated.

The average student debt is $30,000, but many students owe well over $100,000 when they graduate, and it isn’t unusual today for grad students from Ivy League schools to amass debts totaling over a quarter million dollars. Unless you’re fortunate enough to land a six- or seven-figure job, those loans will never go away. Never.

Deja and Zhane might not be in college yet, but they know the difference between “aid” and “debt.” Other college students aren’t so wise. One of my own students, repeating a required English course for thethird time, was rather flippant when I cautioned her that she was amassing a huge debt without making any progress toward graduation. “I don’t have to pay for it,” she said proudly. Thinking she meant that her parents or grandparents were footing her tuition bills, I reminded her that she should be more respectful of their money. “Oh no,” she crowed, “they don’t have to pay either. The school gave me financial aid!” This poor, foolish girl thought “aid” meant “help.” She had no idea that it really meant, “Let me hold the door for you as you step into a lifetime of debtors’ prison.”

Unless you’re fortunate enough to land a six- or seven-figure job, those loans will never go away. Never.

At the university where I teach, I encourage my students to purchase their textbook, an anthology of classic literature, on Amazon. Cheap, used editions are seldom available at the college bookstore because the book is updated every three years, making the older editions conveniently obsolete. Half the time the new edition is the only option, and they can’t sell it back at the end of the semester because a new edition is usually about to come out. But I don’t care which edition they use. It’s classic literature, after all! Most of my students find the book online for $5 or so (one found it for a penny!), instead of paying $120 for the new edition at the bookstore. However, last semester I received an email from the dean: “Please encourage students to purchase their books at the college bookstore. Remind them that this is to their advantage, as they cannot use their financial aid if they purchase books online.” So let me get this straight: my students are better off borrowing $120 from Sallie Mae and paying 4–8% interest for the next 20 years than they would be if they simply skipped Starbucks for one day and bought the book online with cash? What kind of new math is that?

“Learn now, pay later” is one of the main reasons tuition has skyrocketed in the past two decades. When students can enroll without putting a penny down, they don’t give enough thought to how much it’s going to cost them later, and colleges can raise tuition almost indiscriminately. When our daughter began college at a private southern California university 15 years ago, she was awarded a scholarship that covered 50% of her tuition. We were delighted, and budgeted accordingly as we allowed her to select this expensive school. By the time she graduated four years later, however, the scholarship was only covering 25 % of her tuition, because tuition had doubled in those four years. How can anyone plan for college, when tuition is changing that drastically?

Banks would not be awarding these astronomical, uncollateralized loans to unproven debtors if the government weren’t guaranteeing the loans.

I fear for this generation whose future is being sold for a mess of pottage. Fully 60% of students accept some kind of loan for college, without ever considering the consequences. Most of them are mere teenagers when the university’s suave, educated, comforting grownups tell them to sign their lives away on the dotted line because “that’s the way everybody does it.” After all, it’s financial aid. The government is helping you get ahead. Aren’t you lucky.

I’m not suggesting that these loans should be forgiven. I don’t really have a solution for the 40 million Americans who are already hopelessly strapped with debts they knowingly contracted. I certainly don’t think free college is the answer. But something has to be done. Banks would not be awarding these astronomical, uncollateralized loans to unproven debtors if the government weren’t guaranteeing the loans by making them undischargeable through bankruptcy, and college tuitions wouldn’t be rising beyond the ability to pay if these loans weren’t creating artificial demand.

As I left the grocery store that day I congratulated Deja again on her wisdom in avoiding debt. By saving her own money for college, she is more likely to spend it carefully on a degree that truly interests her, and she’ll study more effectively because she won’t want to waste the money she has worked so hard to earn. She’ll live at home with her mother and sister instead of paying $1,000 a month for dorm life, and she plans to attend community college before transferring to a university, which will also help keep her costs down. She expects to have enough saved to pay for her first year of tuition by September. And she sleeps well, knowing that her savings account, not her loan balance, is growing.

Smart girl.




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It’s Déjà Vu All Over Again

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The latest news on the American auto industry brings back bad memories of Obama’s crooked crony nationalization of GM and Chrysler. We may well be seeing the setup of another round of bailouts in our dysfunctional domestic auto industry.

Start with a recent report on the nervousness in the industry during the run-up to the Federal Reserve decision on whether to move off the Fed’s seemingly endless zero-interest rate policy. The auto industry has been selling a lot of cars for cheap money; as the report notes, the apparent revival of the domestic auto industry has been facilitated by an explosion of auto loans. Earlier this year, the combined auto debt of US households hit an all-time high of over $1 trillion. The artificially low interest rates, along with the drop in gasoline taxes (brought about by the miracle of fracking) worked like Viagra to swell the American libido for new cars. The sales of domestic cars will likely exceed 17 million units for the year — a level not seen since 2001.

GM alone has recorded more than $25 billion in profits over the last five and a half years, and Chrysler has recorded 65 months of sales growth. All this is the aphrodisiacal effect of 0% interest rates on auto loans. One couple quoted in the report said they just bought their first car in 20 years, enticed by the 0% financing, though they chose a 1.95% rate loan because of a $3,000 rebate (which they apparently used to cover their down payment). This is a common perception now: the University of Michigan’s most recent household survey showed that 28% of the households surveyed pronounced it a great time to buy a car because of the low rates.

We may well be seeing the setup of another round of bailouts in our dysfunctional domestic auto industry.

Moreover, customers are using the low easy money to buy more expensive cars. This has all the signs of a government-induced easy credit asset bubble: buy expensive cars you otherwise can’t afford, since the government has made it clear that it prefers borrowers who recklessly spend to savers who prudently forego immediate gratification. That is about as sound an economic theory as it is a moral one! Can we spell “moral hazard,” boys and girls?

However, as the report observes, easy credit brings the risk of easy defaults. And that risk has been growing like a virus: in 2013, 10.3% of auto loan applications were declined as not being credit worthy; this year, the proportion was a risible 3.3% — a drop of two-thirds!

Easy money is translating into longer loans on more expensive vehicles. Last month, the average length of an auto loan was over 68 months — six months more than it was a decade ago — a rise of nearly 10%. The size of the average auto loan is now $29,000, an increase of 15% over five years, while the average down payment amount has only increased by 10%, meaning that the loans are backed by relatively smaller down payments.

Earlier this year, the combined auto debt of US households hit an all-time high of over $1 trillion.

More bubbly still is the fact that subprime auto loans — i.e., loans to people with poor credit histories — now constitute one-fifth of all auto loans, with the total balance outstanding on subprime loans rising over the past five years to a whopping $176 billion. Many of these loans, please note, were originated by finance companies with ties to the automakers. Subprime auto loans, like subprime mortgages before the mortgage meltdown, are being bundled as securities and sold on Wall Street to people who buy them because they have higher interest rates.

Sound familiar?

Now consider another recent report, this one about the latest capers of the UAW — the main instigators of the American auto industry’s problems, and the greatest beneficiaries of Obama’s corrupt socialization of GM and Chrysler. In that deal, the GM and Chrysler bondholders and the taxpayers were totally shafted in favor of the UAW. The only real concession was the institution of a two-tier wage scale, by which existing autoworkers kept their outrageous salaries, while new hires were to come in at a lower rate — roughly $9 an hour (or about $19,000 a year) less. This irks the new hires, who often do the same work as the “upper tier” workers.

And here it gets interesting. Recently, under Rick Snyder’s enlightened governorship, Michigan — historically a state totally dominated by the unions — chose to become a right-to-work state. Thus, many UAW members — formerly coerced into supporting a mob of rentseekers — are now free to leave the union plantation. Some of the newer members, tired of being at the low end of the scale because of the UAW contract, and tired of seeing the UAW mismanage their dues, are indicating that they intend to do just that.

Subprime auto loans, like subprime mortgages before the mortgage meltdown, are being bundled as securities and sold on Wall Street.

This has led the UAW to maneuver the weakest of the three domestic automakers, Chrysler — oops! Fiat Chrysler — into signing a new contract, a contract much more favorable to the UAW. Under this new deal, after some period of time (not yet revealed), the current cap of under $20 an hour for new hires will rise to about $25 an hour (that is, new autoworkers will start out at $52,000 a year!). The two-tier system will be phased out. In keeping with its past modus operandi, the UAW will get GM and Ford to agree to the sweetened contract.

The big picture is clear. The weakest of the domestic automakers, which has on two prior occasions had to be bailed out by the federal government, at massive costs to the taxpayer, has just agreed to go back to overpaying the unionized workforce. It can do this because of the “red hot” pace of sales.

But the hot sales are inflated by the Fed’s easy money policy, and the surge of subprime loans; and sooner or later, the Fed will have to start raising interest rates. Thus, sooner or later, the nation, which has been enduring a slow, painfully shallow recovery, will slide back into recession. Then we will see the inevitable plunge in car sales, with the domestic automakers again locked into ludicrously high wage rates.

The weakest of the domestic automakers, which has on two prior occasions had to be bailed out at massive costs to the taxpayer, has just agreed to go back to overpaying the unionized workforce.

And then it will be what that great American philosopher Yogi Berra — sadly departed, this September — called “Déjà vu all over again!” We will probably see Chrysler (and even GM) go into the red once more. We will hear, once more, about the piteous plight of the company, about how sad it would be for all those overpaid employees to be laid off, and about how “compassion” — always defined by the progressive elites as spending other people’s money to buy votes for the advocates of big government — dictates another bailout of a joke of a company.




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The Greek Deceit

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It’s remarkable to me, the degree to which reporting on the continuing Greek crisis is sympathetic to the Greek government, whose intention is to continue stiffing its creditors, and hostile to the “hardline” states (such oppressors as Germany, Finland, Slovakia, and Slovenia), who want to obtain some assurances that if they increase their subsidies to spendthrift Greece, the Greek government won’t continue to lie to them.

The extent of the lying is indicated by a stray passage of pro-Greek rhetoric appearing in the Washington Post on Sunday:

Some [creditors’] requirements encompass such dramatic social and political reforms — such as ending government cronyism and safeguarding the integrity of economic statistics — that it’s unclear when or even if they could ever be achieved.

“We don’t agree on many points,” a member of the Greek delegation said as negotiations dragged on. “It’s problematic.”

Interesting. It’s dramatic to want accurate economic statistics. How could this ever be achieved? And notice the Orwellian synonym for ending deceit: “safeguarding the integrity of economic statistics.”

In the same report, we learn that Greece is experiencing “the deepest recession of any developed nation since World War II.” I guess the total wipeout of the central European economies in the late 1940s didn’t hold a candle to the torture now experienced by bankrupt Greece. I guess that communist Europe was doing swell, compared with contemporary Greece. I guess that Franco’s Spain was sitting pretty, compared with poor little Greece.

Is there anyone who believes this stuff? I don’t know. “It’s problematic.”




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Election 2014: The Ballot Measures

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Libertarians should take encouragement from some of the ballot measures in the Nov. 4 election:

Medical freedom

Arizona voters passed Proposition 303, which seeks to allow patients with terminal illnesses to buy drugs that have passed Phase 1 (basic safety) trials but are not yet approved by the Food and Drug Administration.

To libertarians, this is an old and familiar cause and one in which it is easy to find allies if people are paying attention, which most times they are not. The movie Dallas Buyers Club provided an opening, and this year legislatures in Colorado, Missouri and Louisiana passed what are now called “Dallas Buyers Club” laws. In Arizona, the cause was promoted by the Goldwater Institute.

Opponents have said that such laws will give many terminal patients false hope, which is surely true. But it is better to give 90% false hope if 10% (or some other small share) obtain real benefit, if the alternative is an egalitarian world of no hope for all. And it ought to be the patient’s decision anyway.

What the FDA will do about the “Dallas Buyers Club” laws is a question; as with marijuana, the matter is covered by a federal law, if one of questionable constitutionality. At the very least the Arizona vote, a whopping 78% yes, should give other states, and eventually Congress, a political shove in favor of freedom.

Marijuana

Legalization measures were first passed in 2012 by the voters of Colorado and Washington (the two states that had the Libertarian Party on the ballot in 1972). They have been followed this year by the voters of Alaska, which passed Measure 2 with 52%; Oregon, which passed Measure 91 with 55%; and the District of Columbia, which passed a decriminalization measure, Initiative 71, with 65% yes.

Alaska and Oregon were early supporters of marijuana for medical patients, as were Colorado and Washington. When the opponents say medical marijuana is a stalking horse for full legalization, they are right. It is — which means that more states will join Alaska, Washington, Oregon, and Colorado.

On Nov. 4 Florida rejected medical marijuana, but only because it required a 60% yes vote. Florida Amendment 2 had nearly 58%.

Taxes

In Massachusetts, which several decades ago was labeled “taxachusetts,” voters approved Question 1, which repeals the automatic increases of the gas tax pegged to the Consumer Price Index.

In Tennessee, Amendment 3, forbidding the legislature from taxing most personal income, passed with a 66% yes vote. Tennessee is one of the nine states with no general income tax, though it does have a 6% tax on interest and dividends, which will continue.

In Nevada, 79% of voters rejected Question 3, to create a 2% tax on adjusted business revenue above $1 million. Proponents called it “The Education Initiative” because the money was to be spent on public schools; opponents called it “The Margin Tax Initiative.” The measure was put on the ballot with the help of the Nevada branch of the AFL-CIO, which then changed its mind and opposed it. Good for them; most people and organizations in politics never admit of making a mistake.

Debt

In Oregon, Measure 86 would have created a fund for scholarship grants through the sale of state bonds. The measure was put on the ballot by Oregon’s Democratic legislature and supported by the education lobby. It was opposed by the founder of the libertarian Cascade Policy Institute and by the state’s largest newspaper, the Oregonian, because of the likely increase in public debt. It also would have allowed the legislature to dip into the fund for general spending if the governor declared an emergency. In this “blue” state, the measure failed: 59% no.

Regulation

In Massachusetts, which has had mandatory bottle deposits on carbonated beverages since 1982, voters rejected Question 2, an initiative to extend the bottle law to sports drinks, juices, tea and bottled water (but not juice boxes). The vote was a landslide: 73% no.

Abortion

Libertarians are divided on abortion, depending on whether they consider a fetus to be a person. Voters in Colorado rejected Amendment 67, which would have defined an embryo or fetus as a “person” or “child” under state criminal law. The vote was 64% no.

In North Dakota, a “right to life” amendment the state legislature put on the ballot as Measure 1 was rejected, also 64% no.

In Tennessee, voters approved Amendment 1, which asserts state control over abortion but would leave to the legislature what sort of control it would be. Opponents called it the “Tennessee Taliban Amendment.” It got 53% of the vote.

All of these measures are probably symbolic only, because the question has been coopted by the U.S. Supreme Court under Roe v. Wade and later decisions. Still, symbolism can matter.

Alcohol

In Arkansas, where about half the counties are dry, Issue 4 would have opened the entire state to alcohol sales. It failed, with 57% voting no. That’s a loss for freedom if a gain for federalism.

Guns

Washington voters passed Initiative 594 to require background checks for sales of guns by non-dealers. The measure was bankrolled by Michael Bloomberg, Bill and Melinda Gates, and a liberal Seattle venture capitalist and given an emotional push by shootings at a nearby high school. Washington remains a concealed-carry state.

Minimum wage

Politically, this is a lost issue for libertarians. On Nov. 4, Arkansas voted to raise its minimum from $7.25 (the federal minimum) to $8.50 by 2017; Alaska, to raise its minimum from $7.75 to $9.75 by 2016, and index it to inflation; Nebraska, to raise it from $7.25 to $9 by 2016, and South Dakota, to raise it from $7.25 to $8.50 by 2015, then index it. These measures passed by 65% in Arkansas, 69% in Alaska, 59% in Nebraska and 54% in South Dakota.

In Massachusetts, voters approved Question 4, mandating paid sick days in private business. The yes vote was 59%.

Governance

In Oregon, voters rejected the sort of “top two” election system operating in neighboring Washington. In that system, anyone can file in the primary and declare their party allegiance, and the top two vote-getters, irrespective of party, advance to the November election, which becomes a run-off. California has a similar system. Little parties like the Libertarian Party hate it, because it keeps them off the November ballot except in some one-party districts.

Oregon voters were offered a top-two system in 2008 and voted 66% against it. This time, for Measure 90, they voted 68% against it.




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Yet Another New Record

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Well, the autocrat occupying the White House got his way. President Obama, with the able assistance of his worshipers in the mainstream media — i.e., the mainstream media in totality — forced the Republicans to give in on both funding the government and raising the debt limit, with no cuts of any kind, especially to ObamaCare. Obama promptly celebrated with a gloating, moon-in-your-face news conference, in which he bragged about his achievement.

And he promptly set a new record. The first day the limit was raised, he added an eye-popping $328 billion to the national debt — yes, in one day. This was the greatest addition to the US debt in history, eclipsing the earlier record of $238 billion added in one day. That one was set in 2011, by none other than Obama himself.

Actually, the neosocialist nabob set two new records. The second was, for the first time, a thrust of the national debt to over $17 trillion — to be exact, $17.075 trillion. This is hugely ironic, considering the fact that the fiscally incontinent Obama accused his predecessor of being “unpatriotic” for incurring far less debt.

The lapdogs in the mainstream media have not touched this story, although they were willing to run phony stories about how the poor citizens were suffering under the government shutdown and the “threat” of default (the only threat, of course, came from Obama).

Unfortunately, however, the debt story is even worse than indicated above. According to the deal Obama pushed for and won, he can add as much debt as he wants until February 7 of next year. That gives him four months to keep adding hundreds of billions a day, if he chooses.




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When Greed Isn't Good

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There’s No Such Thing as a Free Education

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The refusal of the Senate to accept a measure that would keep interest rates artificially low on government-subsidized student loans should be an encouraging sign. The senators who voted against the measure, and those in the House who said they will do the same if the bill makes it to them, understand that government intervention leads to unintended consequences. In this instance the unintended consequence of government intervention — in the form of manipulating interest rates — has been an increase in the cost of post-secondary education.

Money is a commodity. Interest rates reflect the price of that commodity. A borrower pays a price, in the form of interest, to the lender. The price of a commodity reflects what a borrower is willing to pay and what the lender is willing to accept. Numerous factors go into setting a price. But at the most basic level, supply and demand will set the appropriate price so that market equilibrium can be reached. As demand goes up, price will go up until the supply matches the demand. If there is an oversupply, demand decreases as too do prices.

Education and training are necessary for a productive workforce — but the right kind of education and training, not a generic form.

However, when the government interferes with markets, signals are distorted and equilibrium cannot be achieved, as supply and demand are not allowed to react to one another naturally. By keeping interest rates low the government has created an artificial demand for higher education. In this particular instance the cost of borrowing money in the form of a Stafford loan is cheaper than it ought to be, which means that more students will borrow money. In a free market these people may have found their way into the workforce or a technical college, but now they are pursuing four-year degrees which may or may not help them in the long run — just because the money is cheap. The result is that colleges now have more customers, i.e. students, demanding their services. In response they raise their tuition, because as demand goes up price goes up as a result.

The effect of government’s making college more affordable by keeping interest rates artificially low is a higher cost of education. This not only makes for a greater debt load for graduates who take government subsidized loans but also prices middle-class students out of education. This means that they too will have to resort to taking out loans and unavoidably piling on debt. It is a vicious circle that can only be avoided if interest rates are allowed to follow market principles. In that event, the accurate price will be charged for borrowing money and for the cost of education.

The nation’s single minded pushing of four-year degrees on our youth has had deleterious effects on the development of our workforce. Students who would flourish with training in the industrial arts are being pushed to a four-year degree that may or may not land them a job or match their natural aptitudes. There is a lack of economic sophistication and a sense of humanity in our pursuit of making sure that students move through our higher education system as if on a conveyor belt.

Education and training are necessary for a productive workforce — but the right kind of education and training, not a generic form. Only the market can determine what the right kind of education and training is, and only a system that allows flexibility will encourage students to match their aptitude with their financial aspirations.

Those who support keeping interest rates artificially low for government subsidized student loans do so because they think that keeping rates low will make college more affordable. They therefore castigate opponents for being against the expansion of higher education. This is a cheap argument that ignores market fundamentals and sidesteps a substantive debate. The time for that debate is now.




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The Golden Years

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Beware the Incredible Shrinking Deficit!

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As reported by the Congressional Budget Office, the federal budget deficit is shrinking – and fast. From a high of $1.4 trillion (10% of GDP) in fiscal 2009, it has shrunk to an expected $642 billion (4% of GDP) for fiscal 2013. In other words, the deficit has fallen by about 60% in only four years. Moreover, the CBO sees the deficit declining to about 2% of GDP by 2015. Good news, right? Well, let’s look a bit more deeply.

The brightened fiscal picture is the result of a recovering economy. In February the CBO estimated the deficit would be about $200 billion higher than it now projects. Better than expected revenues caused the CBO to revise its forecast in May. About $100 billion is accounted for by increased individual and corporate tax receipts. The other half comes from payments to the Treasury by Fannie Mae and Freddie Mac, the result of an improving housing market. A continued slow to moderate expansion of the US economy, together with the tax increases and spending cuts enacted earlier this year, will, the CBO says, get us to a deficit that’s only 2% of GDP by 2015.

Obviously, an annual budget deficit equal to 2% of GDP is preferable to one that equals 10% of GDP. But we will still be borrowing hundreds of billions of dollars every year, even during a time that is expected to be relatively peaceful and prosperous. The CBO has trimmed some $600 billion dollars from its ten-year (2014–2023) deficit projection. Under this rosy scenario we will still be borrowing a total of over 6 trillion dollars to keep the federal government running. That’s on top of the 16 trillion or so of government debt (federal, state, and local) that we have already accumulated. All of it is money that our children and grandchildren will have to pay back.

Already voices can be heard crying out that fiscal restraint has gone too far; that there is in fact no deficit or debt crisis; that changes in entitlements are not required; that more public spending, not less, is needed.

Worse, the CBO sees the deficit growing in the latter part of the next decade, reaching 3.5% of GDP by 2023. Rising entitlements and higher interest rates (which make it more expensive for the government to borrow) will cause deficits to expand in the future. Indeed, the current low cost of borrowing is responsible for both the economic recovery (tepid though it is) and the government’s ability to continue living beyond its means. Even a modest increase in rates would likely snuff out the recovery and cause deficits to soar once again.

We are, so to speak, temporarily becalmed, with a fiscal tempest on the horizon. Yet already voices can be heard crying out that fiscal restraint has gone too far; that there is in fact no deficit or debt crisis; that changes in entitlements are not required; that more public spending, not less, is needed if America is to sail into a brighter future. These voices are coming from the port side of the ship, with the irrepressible scribbler Paul Krugman shouting loudest.

The Krugmanite argument is not merely a call for steady as she goes, but an appeal to stoke the fires and sail full speed ahead into that tempest on the horizon. Steady as she goes is probably a justifiable short-term policy, given the iffy nature of the recovery. But stoking the deficit fires is a course pointed at eventual shipwreck. The Krugmanites see government, and specifically government spending, as the solution to our economic and fiscal problems. More spending, not less, is their mantra. But in reality we need to free up the American economy to promote growth and innovation. And that can only be done by shrinking government.

I’m no anarchist. I believe there are certain functions that government must perform in a civilized society. Moreover, I’m not opposed to any and all government spending to stimulate economic activity. For example, I would favor major spending on infrastructure, a crucial and long-neglected component of our economy. But such spending should be offset by major reductions and restructuring elsewhere. Entire government departments (Energy, Commerce, and Education, for example), should be radically modified or abolished. Entitlements must be means-tested. The tax code requires thoroughgoing reform, with rates lowered for both individuals and corporations, deductions capped, and loopholes and accounting gimmicks abolished completely, or almost so.

Finally, while we should not simply retire within our own borders, we must shrink the warfare state. We currently have bases in over 100 countries, and account for three-quarters of the NATO alliance’s military spending. A minimum 25–30% reduction in the US Defense budget, implemented over a five to seven year period, with concomitant changes in outlook and mission, would be most desirable. We have managed to ignore the crisis in the Congo, where some 7 million people have died in a civil war that began in 1997. If we can ignore those millions, why should we be exercised about the Syrians or the Afghans? No, the time has come (indeed, is well past) to admit that we cannot right every wrong in the world, that interventionism is too expensive and only rarely successful.

To continue as we have will almost certainly lead to fiscal and economic ruin in the 2020s or 2030s. The short-term shrinking of the deficit is an unexpected gift that we must not squander. We are being given a brief span — a few years only — to correct the errors of the past half-century. If we listen to the Krugmanites we may not become Greece writ large, but we will doom our descendants to less prosperity and a burden of debt that they had no part in creating, and that may, eventually, crush them.




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