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Danielle Pletka

Hey North Korea! We won’t attack you, but it’s okay if you attack us. Love, Barack Obama

By Danielle Pletka

February 29, 2012, 5:23 pm

Earlier today, I passed along the exciting news that senior State Department official Wendy Sherman had once again helped deliver the North Koreans to the negotiating table, a reprise of her Nork work of the Clinton years. And indeed, the new deal looks a lot like the deal Mrs. Sherman did back then, except…. Apparently one of the things the North Koreans really wanted back in 2000 after the fateful U.S.-North Korea negotiation that achieved… well, nothing, but that’s not our story here. Let me start again. Apparently, one of the things the North Koreans really wanted back in 2000 was a promise from the United States that it harbored “no hostile intent” toward the loathsome Pyongyang dictatorship. And in return for that commitment, duly offered, they promised that they too, despite their nuclear weapons, their missiles pointed at our troops in South Korea, their proliferation of missiles and nuclear technology to America’s enemies, also had no “hostile intent” toward the United States.

So, when the Bush administration sought to reprise the Clinton years and do a deal with Pyongyang, NK again looked for the “no hostile intent” promise. And Colin Powell delivered those three little words every dictator loves to hear. But George W. Bush just wouldn’t say it, and so no grand bargain was reached. Mrs. Sherman slapped Bush for that omission in a 2005 interview with the Washington Post, explaining that the North Koreans couldn’t trust us without such a promise because: “Ultimately, it is about regime survival.”

So, let’s get this straight: Bill Clinton and his negotiator promised North Korea “regime survival” in 2000. George W. Bush didn’t really, which is why, according to Mrs. Sherman, he failed.

And now, what are we promising? Yes, North Korea, there is a Santa! In the trumpeted North Korea agreement released today, the United States pledged once again that we harbor “no hostile intent” toward the Pyongyang regime. But unlike the 2000 agreement, apparently the North Koreans do not reciprocate, and make no such commitment.

So let’s review the bidding one last time. President Obama has “no hostile intent” toward North Korea, but seeks no such assurance from North Korea that the American people will be safe from Pyongyang’s predations. Another diplomatic triumph!

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Categories:  Asia Pacific, Foreign and Defense   |   Tags: ,

Nick Schulz

Information rules and regulations

By Nick Schulz

February 29, 2012, 3:15 pm

Washington Post reporter Cecilia Kang is terrific at covering the myriad battles roiling tech-land, from patents to spectrum to anti-trust and more. But in a piece on the high “cost” of switching from Google to other information providers, she mischaracterizes what’s happening in info-tech. It’s important to get this right because a misunderstanding of the nature of information services can lead to misguided regulation.

She writes:

Consumers may be free to leave, analysts said, but Google’s services are designed to be sticky. Such tactics are widely used in the tech industry and elsewhere. Apple makes its apps and music on iTunes so they are compatible only with the company’s iPhone and iPad. Facebook friends cannot be transferred to other social networks. Cellphone companies urge customers to sign contracts. Even banks make it complicated to switch to competitors.

Indeed, the need for high “switching costs,” especially in Web business, was noted by Hal Varian in 1998, before he became Google’s chief economist. He noted that fickle consumers can change loyalties with a click of the mouse. “Once you have a chosen technology, or a format for keeping information, switching can be expensive,” he wrote in “Information Rules: A Strategic Guide to the Network Economy.”

Kang makes it sound like it’s some nefarious plot (e.g. “tactics are widely used…”) of firms — Apple, Facebook, Google and others — to lock in customers.  But that’s not really what Varian or other students of the information economy had in mind. Varian was simply describing the nature of network effects and information goods and services. Indeed, just after the quote Kang cites, Varian states “this type of situation is the norm in the information economy.” Important from a regulatory standpoint, Varian also goes on in the book to explain to users/buyers of information goods and services “how to avoid [lock-in], or at least anticipate it.” It is sometimes hard for regulators to believe, but consumers of goods in competitive markets have a considerable amount of power and choice.

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Categories:  Economic Policy   |   Tags: ,

Andrew P. Kelly

A new breed of educational R&D?

By Andrew P. Kelly

February 29, 2012, 3:03 pm

My colleague Rick Hess hosted a killer panel this morning on a proposal to create a version of the Defense Advanced Research Projects Agency (DARPA) for education. You may remember DARPA from such things as, I don’t know, inventing the internet. For a cool example of DARPA’s approach to problem solving, look no further than the “red balloon” experiment described here.

Colorado Senator Michael Bennet (D-Colorado), the sponsor of a new “Education-ARPA” proposal, provided the keynote remarks. The blue-ribbon panel included Jim Shelton of the Education Department’s Office of Innovation and Improvement, John Easton of the Institute for Education Sciences, and Ken Gabriel, the Deputy Director of DARPA.

I had heard of DARPA’s many successes but knew little about how it operates, so Gabriel’s comments were particularly intriguing. The agency is lean (just 200 employees), flat (four levels in the hierarchy), and turns over quickly (3-5 year terms are the norm). Project directors are free to contract with interests across the private sector and top research universities.

Translating DARPA into E-ARPA will be a technical and financial challenge. For me, though, today’s conversation raised a fundamental question about the politics and culture of education research:

Can the education community get comfortable with the failure that innovation often requires?

On this front, DARPA has two decided advantages: “hard” science and secrecy. First, I get the sense that most of these cutting edge projects are based in the hard sciences, far away from human subjects whose lives will be improved or unchanged by experimentation with a new innovation. Second, DARPA’s projects often evolve in secret for national security reasons. If an experiment fails to produce results, it’s not likely to make the front page of USA Today, much less under the byline of an industry rival.

Education research couldn’t be further from this reality. Piloting a digital learning idea in a set of classrooms? You had better be ready for the public “I told you so’s” that will result if it does not succeed. Experimenting with a new type of teacher incentive? Be prepared to see a series of “incentives don’t work” op-eds if/when the results fail to live up to expectations.

The discomfort with failure is understandable but stunting. Perhaps E-ARPA’s most transformative work will be in creating a beachhead for a new breed of educational R&D, one that is comfortable learning from both failures and successes.

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Categories:  Education   |   Tags: ,

Andrew P. Kelly

A (symbolic) win for innovation in higher education

By Andrew P. Kelly

February 29, 2012, 3:02 pm

Over the past two years, the Obama administration has unveiled an expansive new package of “program integrity” regulations for higher education. Two of those provisions—one creating a federal definition of the “credit hour” and one requiring online postsecondary providers to obtain state authorization wherever they enroll students—effectively erect barriers to innovative providers.

Yesterday, a large bipartisan House majority, including sixty-nine Democrats, voted 303-114 for a bill that would repeal both provisions (H.R. 2117). While the bill has little chance of passing the Democrat-controlled Senate, the House vote represents a symbolic win for proponents of innovation in higher education. What’s at stake?

Defining the credit hour:

The logic: A federal definition will prevent colleges from inflating the value of their credits so that students can fulfill the requirements for financial aid. The regulation defines “credit hours” as one hour of direct faculty instruction and two hours of out of class work for 15 weeks (or “reasonable equivalencies”).

The problem: Some of the most promising innovative models in higher education are not based on seat-time and/or a traditional academic calendar. How would we define a “credit hour” for a competency-based program, where students learn at their own pace and then take proctored exams to prove their competencies (a la Western Governor’s University)? By coercing nontraditional providers into traditional boxes, the credit hour regulation would limit the options available to working adults and other “nontraditional” enrollees that are best served by these models.

State authorization:

The logic: Colleges that provide postsecondary education in a different state are often obligated by individual states to obtain approval. Online providers present something of a challenge in that they may enroll students in states where they have no “physical presence.” In a strange twist on federalism, the regulation ties eligibility for federal aid to state authorization.

The problem: The rule forces online providers to gain separate approval from every separate jurisdiction where they enroll students, generating serious transaction costs, duplication, and redundancy. A survey of 230 institutions with online programs by an accrediting agency found the average cost to institutions would be about $150,000 a year. Fifty-nine percent reported that they would stop accepting students from states with burdensome authorization requirements.

At a time when the nation is looking to provide more high quality postsecondary education for less money, these regulations push higher education in the opposite direction. Congrats to the House coalition for acting to remove these barriers.

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Categories:  Education   |   Tags:

Danielle Pletka

Eun, two, three: Here we go again with North Korea

By Danielle Pletka

February 29, 2012, 3:02 pm

Ah, the power of engagement. New North Korean leader Kim Jong Eun has reportedly agreed to a wide-ranging deal with the Obama administration. According to the State Department, the Norks will

“… implement a moratorium on long-range missile launches, nuclear tests, and nuclear activities at Yongbyon, including uranium enrichment activities.” Also part of the deal: the return of IAEA inspectors to verify any moratorium on enrichment and confirm the reactor at Yongbyon is disabled. What’s the quid to Pyongyang’s quo? 240,000 metric tons of food aid to North Korea.

If you’re hearing a little bit of snark in my tone, it’s because we’ve been on this roadtrip before with NK. They’ve never abided by, no joke, a single agreement. But they’ve pulled the wool over the eyes of successive administrations, always with the eager acquiescence of the Department of State (often in the person of Wendy Sherman, now reincarnated as Undersecretary of State for Policy), and under the trustful eyes of the intelligence community, which denied North Korea had a uranium enrichment program even after the Norks told… TOLD… American negotiators that they did.

So here’s what I’m looking for:

1. Verification.

2. Proof NK isn’t diverting food to its military, which it has done with all such previous shipments.

3. Evidence the Obama administration is demanding an end to Pyongyang’s proliferation of missiles and possibly nuclear tech to Iran, Syria, and anyone else with a buck to spare.

Once those things are in the bag, we can start on freedom, human rights, rapprochement with the civilized world, etc. This time could be different. But keep your eyes open, and be informed by this litany of past agreements and transgressions by North Korea compiled by the fine folks at the Senate Republican Policy Committee:

 January 1992:  North Korea agrees to permit IAEA inspections of North Korean nuclear facilities.
 January 1993:  North Korea refuses IAEA access to suspect nuclear sites.
 October 1994:  The Clinton Administration completes the Agreed Framework with North Korea providing for a nuclear-free Korean peninsula and extensive energy assistance from the United States.
 August 1998:   North Korea test fires a missile over Japan.
 September 1999:  North Korea institutes a moratorium on long-range missile tests.
 January 2003:  North Korea withdraws from the Nuclear Non-proliferation Treaty (NPT).
 September 2005:  A Joint Statement is issued from the six-party talks, in which North Korea committed “to abandoning all nuclear weapons and existing nuclear programs” in exchange for energy and economic cooperation and steps toward normalization.
 September 2005:  North Korea quits the six-party talks a week later.
 July 4, 2006:  North Korea tests seven missiles, including one long-range missile.
 October 2006:  North Korea proclaims it tested a nuclear weapon.
 February 2007:  An Initial Actions Plan is completed in an effort to move forward the September 2005 Joint Statement, in which North Korea agrees to shut down its Yongbyon nuclear facility within 60 days “and invite back IAEA personnel to conduct all necessary monitoring and verifications,” in return for an initial shipment of emergency energy assistance.  North Korea never fulfills this promise.
 September 2007:  Israel destroys a building in Syria the IAEA concludes “was very likely a nuclear reactor” and was “comparable” to the nuclear reactors at Yongbyon in North Korea.
 October 2007:  North Korea agrees “to provide a complete and correct declaration of all its nuclear programs—including clarification regarding the uranium issue—by the end of the year.”  This agreement, too, is never implemented.
 April 2009:  North Korea tests a long-range missile directed at threatening the United States.
 April 2009:   North Korea expels IAEA inspectors from Yongbyon.
 May 2009:  North Korea announces it conducted a nuclear weapon test.
 March 2010:  North Korea sinks the South Korean ship Cheonan, causing the murder of the 46 sailors aboard.

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Categories:  Asia Pacific, Foreign and Defense   |   Tags: ,

Why doesn’t Romney propose eliminating the corporate income tax?

By James Pethokoukis

February 29, 2012, 2:49 pm

If there’s one thing about Mitt Romney’s economic plan that drives conservatives crazy, it’s his take on investment taxes. He would a) maintain the current 15% tax rate on interest, dividends, and capital gains for taxpayers with AGI of $200,000 or higher and b) eliminate investment investment taxes for everyone else.

A better plan would be to eliminate all investment taxes and nudge the U.S. tax system into becoming more of a consumption tax, which would boost economic growth. But if Romney proposed such a plan — as, for example, Newt Gingrich does — it would mean he would essentially be proposing to cut his own taxes to near zero. Awkward at best, politically untenable at worst.

But as a new study from Ernst and Young shows, taking into account both the corporate and investor level taxes on corporate profits and state level taxes, the United States has among the highest integrated tax rates on capital among developed countries. And under President Obama’s current tax plan of letting the Bush tax cuts on capital expire—not even counting Obama’s Buffett rule—here is what happens next year:

– The current top U.S. integrated dividend tax rate of 50.8 percent will rise to 68.6 percent in 2013, significantly higher than in all other OECD and BRIC countries.

– The current top U.S. integrated capital gains tax rate of 50.8 percent will rise to 56.7 percent in 2013, the second highest among OECD and BRIC countries.

OK, here’s an idea: If it would look too self-serving for Romney to recommend killing investment taxes, maybe he should recommend killing the corporate tax instead? (He already wants to lower it to 25% from 35%.) Doing so would dramatically lower that integrated tax rate on capital. It would also avoid the appearance of self enrichment.

And let’s face it, the corporate tax is a lousy tax:

–  Here’s the OECD: “Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes.”

– AEI economists Kevin Hassett and Aparna Mathur have found that “corporate tax rates affect wage levels across countries. Higher corporate taxes lead to lower wages. A 1 percent increase in corporate tax rates is associated with nearly a 1 percent drop in wage rates.”

– “Corporate income taxes have a highly significant and negative effect on long-term growth,” according to the Tax Foundation.

You want more reasons? Megan McArdle offers a whole mess of them.

Rick Santorum would lower the corporate tax rate to 17.5%, zilch for manufacturing companies. Why doesn’t Santorum just flat-out recommend abolishing the corporate tax?

Now in 2011, federal corporate tax revenue amounted to 1.5% of GDP. How would Washington make up for the lost dough? Well, clearly axing the tax would boost economic growth and thus increase tax revenue from other sources. Would that be enough to cover all the $200 billion shortfall?  Probably not. But once you add in  compliance costs, you could probably get the rest of the way by other tax code tweaks.

Kill the corporate tax! Which candidate will take up the banner first?

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Categories:  Fiscal Policy and Taxes   |   Tags:

America’s missing $800 billion

By James Pethokoukis

February 29, 2012, 1:09 pm

Economist Mike Darda of MKM Partners:

Wages and salaries advanced at a 5.4% annualized rate after rising at a 6.5% rate in Q3. After adjusting for prices, real wage and salary income rose 4.5% A.R. in Q4 after a 3.9% annualized rise in Q3. Real wages and salaries are up 3% y/y, the fastest annual rate of increase since 3Q07. Unfortunately, due to the depth of the 2007-2009 recession, wage and salary income is still 11% below its pre-crisis trend. This fact is reflected in the still-low employment/population ratio for prime age adults (25-54) and the still-high level of underemployment and near-record level of long-term unemployment. So, while the recent data are encouraging, there is a long way to go.

Fun coincidence: The missing wage and salary income, $800 billion, is about the same as the cost of the Obama stimulus.

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Categories:  Economic Policy, Fiscal Policy and Taxes   |   Tags: ,

Forget the Laffer Curve. Meet the Krugman Curve

By James Pethokoukis

February 29, 2012, 12:34 pm

It’s just common sense, really. There are two tax rates that generate zero tax revenue, 0 percent and 100 percent. And in between, there is some tax rate which generates a maximum, non-zero amount of tax revenue. As tax rates rise from 0 percent toward that level, tax revenues increase both through higher economic growth and greater tax compliance. Once beyond that inflection point, higher tax rates generate less tax revenue.

This relationship is popularly known as the Laffer Curve, after economist Arthur Laffer, and stands at the heart of supply-side economics—or as I call it, “economics.” Economic historian Bruce Bartlett calls the Laffer Curve “a generally accepted analytical device … [that is] a widely discussed subject in respected academic journals.”

In 1980, the top U.S. marginal income tax rate was 70 percent; today it is 35 percent. Yet the share of total income taxes paid by wealthier taxpayers has risen sharply. That is powerful evidence that the United States was on the wrong side of the Laffer Curve back in 1980.

Yet many liberals think the United States should go right back to where it was three decades ago. After looking at some new research from liberal economists, New York Times columnist Paul Krugman concludes that the “optimal tax rate on the highest earners is in the vicinity of 70 percent.” A 70 percent top rate also sounds pretty good to liberal economist and popular blogger Brad DeLong. And, of course, many liberals think rates should never have been cut back in 1981 by President Reagan. (Indeed, many of these folks speak fondly of the 1950s, when the top marginal rate was as high as 92 percent!)

Is President Obama also a member of the 70 percent club? Does he believe in the Krugman Curve, where taxpayers ignore higher taxes, or the Laffer Curve, where taxes and tax rates matter?

Well, we know for sure that Obama wants the top rate back to 40 percent. And recall his populist speech in Osawatomie, Kansas, where he railed against the economic policy of the past thirty years, when tax rates were cut sharply:

… there is a certain crowd in Washington who, for the last few decades, have said, let’s respond to this economic challenge with the same old tune. “The market will take care of everything,” they tell us. If we just cut more regulations and cut more taxes—especially for the wealthy—our economy will grow stronger. … But here’s the problem: It doesn’t work. It has never worked. … Over the last few decades, huge advances in technology have allowed businesses to do more with less, and it’s made it easier for them to set up shop and hire workers anywhere they want in the world. … In the last few decades, the average income of the top 1 percent has gone up by more than 250 percent to $1.2 million per year. … And if the trend of rising inequality over the last few decades continues, it’s estimated that a child born today will only have a one-in-three chance of making it to the middle class—33 percent. … And yet, over the last few decades, the rungs on the ladder of opportunity have grown farther and farther apart, and the middle class has shrunk.

As Obama wrote in The Audacity of Hope: “The high marginal tax rates that existed when Reagan took office may not have curbed incentives to work or invest … but they did lead to a wasteful industry of setting up tax shelters.” So the only downside to a 70 percent top tax rate and a tax code not indexed to inflation was … excessive tax planning?

François Hollande, the Socialist challenger for the French presidency, just proposed a marginal tax rate of 75 percent on incomes above 1 million euros a year. The Financial Times called it “a surprise offensive against top earners.”

I wonder if a second Obama term, especially if there were to be a debt crisis, would hold a similar surprise.

 

via Wikipedia

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Categories:  Economic Policy, Fiscal Policy and Taxes   |   Tags: , ,

AEI Elsewhere—Empty promises, Romney’s suburban appeal, and more

By The Editors

February 29, 2012, 11:29 am

• Peter J. Wallison: “Empty promise: the holes in the administration’s housing finance reform plan”
• Michael Barone: “Romney appeal in affluent suburbs could change map”
• Desmond Lachman: “Greek economic lessons for Portugal”
• Andrew P. Kelly: “Triggering reform at public schools”
• Michael Auslin: “Putin’s ‘doctor’s plot’?”
• Nick Schulz: “The Obama administration creates a new political market”
• Daniel Vajdic: “Time to cut tactical nukes?“

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Categories:  Uncategorized   |   Tags:

Was Moscow’s Syria veto good strategy?

By Daniel Vajdic

February 29, 2012, 10:12 am

A recent Moscow Times op-ed tries to explain Russia’s obstinate defense of the Assad regime in Syria. According to Peter Rutland of Wesleyan University and Nadiya Kravets of the Harvard Ukrainian Research Institute, the Kremlin’s objectives extend beyond the “narrow self-interest of the Russian defense industry” and “its only warm-water naval base in the Syrian port of Tartus.” Here’s their argument:

From Moscow’s point of view, the Syrian veto makes perfect sense, given that a consistent goal of Russian diplomacy over the past decade has been the quest for recognition as a leading power.

By blocking the Syrian resolution, Moscow was simply sending a signal to the international community that it is a power that should be reckoned with — and one whose views must be taken into account. In the short term, Russia does not stand to gain anything specific from this action. But in the long term, it builds credibility for Russia as a leading power.

In one sense, the tactic has worked. Russia got the world’s attention at little or no cost to itself.

Hmmm. And how, exactly, will Russia assume its role as a “leading power” without any partners—let alone allies—in the Middle East? Its Syria policy has alienated nearly every country in the Arab world. There are even calls to boycott Russia’s already meager exports to the region. I’d hardly consider the Kremlin’s isolated support for Assad a cost-free strategy.

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Categories:  Europe and Russia, Foreign and Defense, Middle East   |   Tags: , ,

Highlights from the Arizona and Michigan exit polls

By Karlyn Bowman and Andrew Rugg

February 29, 2012, 10:05 am

Arizona

In Arizona, Hispanics were 8 percent of the electorate. Thirty-eight percent voted for Romney, 23 percent for Santorum, and 20 percent for Gingrich. The top issue in the poll was the economy (49 percent), followed by the budget deficit (30 percent), illegal immigration (13 percent), and abortion (6 percent).

Attitudes in Arizona and elsewhere about illegal immigrants appear to be softening. Thirty-four percent of respondents said most illegal immigrants working in the United States should be offered a chance to apply for citizenship, 28 percent said they should be allowed to stay as temporary workers, and 34 percent said they should be deported. In 2008, those responses were 24, 29, and 44 percent respectively.

Forty-eight percent of working women in Arizona, a category the exit pollsters broke out for the first time, voted for Romney. Twenty-seven percent voted for Santorum.

Sixty-four percent of Arizonans supported the Tea Party. They supported Romney 43 percent to Santorum’s 31 percent.

Mormons were 14 percent of the electorate, and as expected, they voted overwhelmingly for Romney.

In Arizona, Santorum was voted the “true conservative.” Fifteen percent of voters said that was the most important candidate quality for them. Forty percent said beating Obama was their top quality. Fifty-six percent of those voters selected Romney. Fifty-seven percent in another question said Romney was most likely to defeat Obama.

Fifty-three percent had a favorable opinion of John McCain. Forty percent had an unfavorable opinion.

The Arizona electorate was more conservative than in 2008. Four years ago, 66 percent identified as conservative. Of those, 30 percent said they were very conservative. This year, 74 percent identified as conservative, with 38 percent identifying as very conservative.

Michigan

As he did in Iowa, New Hampshire, and South Carolina, Ron Paul won the vote of the youngest age group in the poll.

Union members (14 percent of Michigan primary voters) and union households (23 percent) voted for Santorum.

Thirty-one percent reported that someone in their household had been laid off in the last three years. They voted for Romney over Santorum by 42 to 36 percent.

Working women in the GOP primary were 21 percent of the electorate. They narrowly supported Romney over Santorum, 40 to 38 percent. Married voters narrowly and unmarried voters more widely supported Romney.

Santorum won the votes of the 30 percent of primary voters who said they were very conservative. Romney won the crucial somewhat conservative vote and the moderate to liberal vote.

Tea Party support was more tepid in Michigan than Arizona. Fifty-two percent supported the movement. Santorum won voters who strongly supported the Tea Party movement (28 percent of the electorate) and those who strongly opposed the movement (12 percent of the electorate).

Catholics supported Romney over Santorum, 44 to 37 percent.

Santorum won the votes of the 16 percent of voters who said being a true conservative was the most important quality to them (58 to 18 percent for Romney). Romney won the vote of those who said being able to defeat Obama was the most important quality (32 percent of voters).

Only 35 percent of the electorate said the recent debate was the most important factor in their vote. Romney won this group by five points over Santorum. Sixty percent said the debate was not the most important factor and they narrowly supported Santorum, 40 percent to Romney’s 38 percent. In general, Santorum won among voters who said they decided how they were going to vote in the past few days. Those who had decided earlier supported Romney.

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Categories:  Politics and Public Opinion, U.S. Politics   |   Tags: , , , ,

Peter J. Wallison

Is Obama serious about privatizing the housing market?

By Peter J. Wallison

February 29, 2012, 10:04 am

Despite publishing a series of options for housing finance reform over a year ago, the Obama administration has done nothing to follow up. In early February, however, in a report to the Financial Stability Oversight Council, Treasury Secretary Geithner promised to make progress this year on winding down the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac and reviving the moribund private securitization market. As I discuss in a new AEI Outlook released today, if this is the extent of the administration’s plan, it will fail.

To be sure, the private securitization market will not revive until the GSEs are wound down, but that in itself will not be sufficient. For the administration’s plan to be credible, it has to include significant limitations on the scope of the Federal Housing Administration’s activities, and amendment or repeal of provisions in the Dodd-Frank Act that stand as obstacles to a revival of private sector activity. Today, the government’s housing finance role, which principally includes the GSEs and FHA, accounts for 95 percent of the market. Pressure from Congress and the administration to reduce mortgage standards in order to revive the housing market will once again result in future losses for the taxpayers, who may have to pay as much as $300 billion to bail out the GSEs and an unknown amount to recapitalize the FHA.

To avoid these recurring and unnecessary costs, the only sensible policy for this country is to gradually turn over the financing of homes to the private sector. The rest of our economy does perfectly well with private sector financing, and there is nothing about the financing of housing that requires government backing. Private securitization has worked well in the past, and if properly structured as outlined in the white paper on housing finance that my AEI colleagues and I issued in March 2011, it can provide stable financing for housing in the future without the need for taxpayer subsidies.

But reviving the private securitization market will not be easy. Fannie and Freddie are serious competitors for any private firm because of their government backing, and FHA—after increases in the size of loans it can insure voted by Congress in November—is an even more formidable obstacle for any firm that wishes to enter the private securitization market. Moreover, the Dodd-Frank Act also creates serious impediments for the private sector, by exempting FHA (and likely the GSEs) from the risk retention requirements in the act and setting up other legal or regulatory obstacles to such things as true sales accounting treatment, hedging under the Volcker rule, requirements for risk retention that favor the largest banks, and many other provisions.

These are serious political hurdles that the administration has allowed to grow—and in some cases encouraged—over the past year. It will be tougher now to turn around the tide that is running against the revival of the private market. But if the administration and Secretary Geithner are serious about restoring a private market in the future, the plan they produce this year must deal with all these issues.

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Categories:  Economic Policy, U.S. Economy   |   Tags: ,

The Romney juggernaut rolls on

By James Pethokoukis

February 29, 2012, 10:01 am

OK, maybe that is overstating things just a smidgen. But a win is a win, and two wins are even better for Mitt Romney. He entered Tuesday as the Republican frontrunner and he exited just the same. Romney has an 83 percent chance of winning the GOP nomination, according to Intrade, which called both Arizona and Michigan correctly. Romney also gave a pretty coherent victory speech that outlined his theory of the case (word cloud via Wordle).

Two themes ran through Romney’s speech. First, Obamanomics still isn’t working despite the uptick in the economy. This is the “Are you better off today than you were four years ago?” part of the argument:

From generation to generation, Americans have always known that the future would be brighter and better. Americans have always believed in a tomorrow full of possibility and prosperity. … That deep confidence in a better tomorrow is the basic promise of America. Today, that promise is being threatened by a faltering economy and a failed presidency. … Did he fix the economy? Did he tackle the housing crisis? Did he get Americans back to work? No. He put us on a path toward debt, deficits, and decline. It is time to get off that path and get back on the path to prosperity. … Today, we’re $15 trillion in debt. Real employment stands at 15%. … You’ve heard the saying, “I need a vacation from this vacation?” Well, we need to recover from this so-called “recovery.”

A few facts that support what Romney is saying:

– During President Reagan’s two terms, debt as a share of GDP averaged 35 percent. Under President Obama’s recent budget, it would average 71 percent of GDP.

– The Congressional Budget Office recently noted that the U.S. unemployment rate has exceeded 8 percent since February 2009, making the past three years the longest stretch of high unemployment in this country since the Great Depression.

– The S&P/Case-Shiller housing price index fell 3.8 percent during the fourth quarter. This index is at its lowest level since 2002. Adjusted for CPI inflation, it is at its lowest since 1998.

So while the pace of the “recovery” has picked up and jobs are being added, let’s not mistake this for some sort of mini-boom. And Romney is smart to point that out.

Then Romney shifted to the “Will you be better off four years from now than you are today under Obama?” part of the speech:

We’ve seen enough of this President over the last three years to know that we don’t need another four. President Obama believes he is unchecked by our Constitution. He is unresponsive to the will of our people. In a second term, he would be unrestrained by the demands of re-election. If there is one thing we cannot afford, it is four years of Barack Obama with nothing to answer to. His budget foreshadows what lies ahead. Runaway spending and record debt were just the warm-up act. For an encore, he wants to raise taxes on job creators and small businesses and families. We will not let him! In this campaign, I am offering a real choice and a new direction. I have a plan that will restore America’s promise through more jobs, less debt, and smaller government.

And the debt issue really plays into this. Sure, maybe the economy is doing better. But the “recovery” isn’t “built to last” because Washington is running up so much debt.

As for Santorum, Intrade now has him at 7 percent, down from a high of 16 percent mid month. He had an awful debate. He’s been hammered in the press. And he just lost two swing states. Here is Santorum’s speech:

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Marc Thiessen

$750,000 for a new soccer field at Guantanamo?

By Marc Thiessen

February 28, 2012, 3:15 pm

The New York Times reported Friday:

Lawyers representing six of the highest-profile detainees at the military prison at Guantánamo Bay, Cuba, sent a letter on Friday to the Pentagon complaining that their clients’ living conditions have deteriorated since a new commander took over the prison last year.

In the five-page letter addressed to William K. Lietzau, the top detainee policy official at the Pentagon, the lawyers complained that some of the food, medicine, and hygienic items given to the prisoners has not been certified as halal, as required for observant Muslims. They also suggest that the amount of recreation time and access to educational and entertainment items, like Arabic newspapers, has been curtailed.

Before you shed a tear for KSM and his cohorts, read this item from the Associated Press today:

Some prisoners at Guantanamo Bay will soon have a new, larger soccer field to help keep them occupied during their indefinite detention.

The U.S. military has nearly completed a new recreation yard in Camp 6, the camp where more than 80 percent of the 171 prisoners are held. Besides a soccer field, it will have a walking trail and exercise equipment. Screened fences block the view of the nearby Caribbean Sea. A spokeswoman says the improvements cost nearly $750,000.

Now granted, high-value detainees are held in a different facility (Camp 7) than the one where this new soccer field is being built (Camp 6). But the idea that detainees at Guantanamo are suffering any sort of deprivation is patently absurd. When he was attorney general, Michael Mukasey toured KSM’s quarters at Guantanamo and observed that KSM had the same elliptical trainer he used in his Manhattan apartment building. The terrorists get the same medical care as our troops; in fact, their care gets higher priority. During a 2009 visit, one officer told me he was suffering from an impacted tooth, but his dentist appointment that day had been cancelled because the dentist had to go see a terrorist. A nurse at the detainee hospital—a state of the art facility for the exclusive use of terrorists—said the biggest health problems the terrorists face are sports injuries and becoming overweight from their 6,500 calories-per-day diet.

Indeed, the food the terrorists receive at Guantanamo is better than what American forces eat in the camp dining facility. According to one officer I spoke with, the military at one point spent $125,000 on baklava for the terrorists to eat each night during Ramadan. The chef in charge of detainee food showed me how she prepared exotic Middle Eastern meals six different ways to accommodate the desires and dietary restrictions of the terrorists—options include the “regular meal,” “soft meal,” “high fiber meal,” “vegetarian meal,” “vegetarian meal with fish,” and “bland meal.”

In addition, terrorists receive special communal “feast” meals twice a week. The chef told me that the food the terrorists get costs more than twice as much as the food served to our forces. One officer shook his head as we looked over the food and asked, “Whatever happened to bread and water?”

The terrorists have satellite television, with access to al Jazeera and Arabic news and sports channels. Camp officials actually TIVO the soccer matches of the terrorists’ favorite teams for them. One officer at Guantanamo told me, “I hope that if I am ever captured, I’m brought to an environment such as this.”  Indeed, in June 2009, one high-value detainee, Ahmed Ghailani, was transferred from Guantanamo to the Metropolitan Correctional Center in New York City and actually requested that he be returned to Guantanamo while he awaited trial, because the conditions were so much better than those in federal prison. Imagine that: a terrorist complaining, “I want to go back to Guantanamo.”

Bottom line: there are plenty of towns and cities here in America that would love $750,000 to build a new soccer field. The fact that we are spending that money to build one for al Qaeda terrorists who would not hesitate to kill every single resident of those towns and cities is simply appalling.

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Categories:  Bin Laden, Foreign and Defense   |   Tags:

Everything you need to know about the power of economic freedom in 3 charts

By James Pethokoukis

February 28, 2012, 11:33 am

The West was quite poor heading into the 1700s and then it got richer. A lot richer. Real fast. Its embrace of economic freedom and creative destruction, both legally and culturally—what economist Deirdre McCloskey calls the idea of bourgeois dignity and liberty—led to a rise in real income per head in 2010 prices from about $2-3 a day in 1800 worldwide to over $100 today.

But China didn’t follow the same path. It did not embrace bourgeois dignity and liberty. It did not embrace innovation. As this chart from Gapminder illustrates, China’s per capita income was $986 in 1800 vs. $1,900 for the United States.

And by 1978, U.S. per capita income had skyrocketed to $28,000 (adjusted for inflation), while China was actually a bit worse off at $861. But 1978 was also the year when China began to open up its economy to enterprise and the West.

By 2010, China’s per capita GDP had surged to $8,000 vs $42,000 for the United States.

See, the Great Recession is not the Big Economic Story of our time. McCloskey:

The Big Economic Story of our own times is that the Chinese in 1978 and then the Indians in 1991 adopted liberal ideas in the economy, and came to attribute a dignity and a liberty to the bourgeoisie formerly denied. And then China and India exploded in economic growth. The important moral, therefore, is that in achieving a pretty good life for the mass of humankind, and a chance at a fully human existence, ideas have mattered more than the usual material causes. …

The Big Story of the past two hundred years is the innovation after 1700 or 1800 around the North Sea, and recently in once poor places like Taiwan or Ireland, and most noticeably now in the world’s biggest tyranny and the world’s biggest democracy. It has given many formerly poor and ignorant people the scope to flourish. And contrary to the usual declarations of the economists since Adam Smith or Karl Marx, the Biggest Economic Story was not caused by trade or investment or exploitation. It was caused by ideas. The idea of bourgeois dignity and liberty led to a rise of real income per head in 2010 prices from about $3 a day in 1800 worldwide to over $100 in places that have accepted the Bourgeois Deal and its creative destruction.

And to keep its economic machine humming, says the World Bank, China must further its embrace of free-market capitalism. The United States, too.

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AEI Elsewhere—GOP is losing the class warfare fight, defense sequestration, and violence in Yemen

By The Editors

February 28, 2012, 11:05 am

• Marc A. Thiessen: “Republicans are losing the class warfare fight”
• Mackenzie Eaglen: “Sequestration: a big word—and a bigger problem that demands action now”
• Katherine Zimmerman: “Yemen’s violence will challenge new government“

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Is Santorum right? Did high gas prices trigger the Great Recession?

By James Pethokoukis

February 28, 2012, 10:06 am

Rick Santorum is getting much grief for this:

Rick Santorum told an audience Monday that the 2008 recession was caused by high gas prices. He said Americans were unable to pay their mortgages—not because of unsustainable housing prices or reckless lending practices—but because of $4-per-gallon gasoline.

“We need to look at the situation of gas prices today. We went into a recession in 2008 because of gasoline prices,” Santorum said to an enthusiastic crowd at a hotel here. “The bubble burst in housing because people couldn’t pay their mortgages because we’re looking at $4-a-gallon gasoline. And look at what happened, economic decline.”

After his rally, which was packed with families with their children, Santorum said he did not misspeak when he was asked to explain his comments. He said it was a “factor” in the recession and the housing bubble.

“Energy prices were spiking in the summer of 2008 and that was a factor,” Santorum told reporters.

But there is some evidence that Santorum has a point. In a 2009 paper, economist James Hamilton found that big oil price shocks—such as the ones associated with events such as the 1973-74 embargo by OPEC, the Iranian Revolution in 1978, the Iran-Iraq War in 1980, and the First Persian Gulf War in 1990—were each followed by a global economic recession. You can see that phenomenon on the above chart.

Now, oil prices doubled between June 2007 and June 2008, the economist notes, a bigger price increase than in any of those four earlier episodes. Hamilton’s conclusion: “Had there been no increase in oil prices between 2007:Q3 and 2008:Q2, the U.S. economy would not have been in a recession over the period 2007:Q4 through 2008:Q3.”

But what about the role of housing? Hamilton points out that housing had been an economic drag before oil and gasoline prices surged. Yet the economy continued to grow. Here’s where oil enters the scene (bold for emphasis):

At a minimum it is clear that something other than housing deteriorated to turn slow growth into a recession. That something, in my mind, includes the collapse in automobile purchases, slowdown in overall consumption spending, and deteriorating consumer sentiment, in which the oil shock was indisputably a contributing factor.

Second, there is an interaction effect between the oil shock and the problems in housing. Cortright (2008) noted that in the Los Angeles, Tampa, Pittsburgh, Chicago, and Portland Vancouver Metropolitan Statistical Areas, house prices in 2007 were likely to rise slightly in the zip codes closest to the central urban areas but fall significantly in zip codes with longer average commuting distances. Foreclosure rates also rose with distance from the center. And certainly to the extent that the oil shock made a direct contribution to lower income and higher unemployment, that would also depress housing demand. For example, the estimates in Hamilton (2008) imply that a 1% reduction in real GDP growth translates into a 2.6% reduction in the demand for new houses.

Eventually, the declines in income and house prices set mortgage delinquency rates beyond a threshold at which the overall solvency of the financial system itself came to be questioned, and the modest recession of 2007:Q4-2008:Q3 turned into a ferocious downturn in 2008:Q4.

Whether we would have avoided those events if the economy had not gone into recession, or instead would have merely postponed them, is a matter of conjecture. Regardless of how we answer that question, the evidence to me is persuasive that, if there had there been no oil shock, we would have described the U.S. economy in 2007:Q4-2008:Q3 as growing slowly, but not in a recession.

Does this all sound a little bit too neat and tidy? Perhaps. But let me point out what Hamilton said is one way oil shocks affect economic growth. They tend to kill consumer sentiment, as this chart from Strategas Research shows:

 

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Categories:  Economic Policy, Energy and Environment, U.S. Economy, U.S. Politics   |   Tags: ,

World Bank to China: Go American

By James Pethokoukis

February 27, 2012, 6:09 pm

While the American left is looking longingly at China’s state-capitalist economic model, the World Bank just published its “China 2030” report advising Beijing to move toward a more free-market capitalist system. In other words, be more like America:

This report makes two points: first, that government should encourage increased competition in the economy, including by increasing the ease of entry and exit of firms as soon as possible; and second, that public resources should be used to finance a wider range of public goods and services to support an increasingly complex and sophisticated economy. Reforms of state enterprises and banks would help align their corporate governance arrangements with the requirements of a modern market economy and permit competition with the private sector on a level playing field. This would create the appropriate incentives and conditions for increased vigor and creativity in the economy in support of China’s successful transformation into a high-income society.

And if Beijing decides to stick to its current model—cheap-labor manufacturing, exports, and the adoption of foreign technology—the Middle Kingdom may end up like many fast-growing emerging nations that eventually got stuck in the “middle-income trap.” As one study found:

Using international data starting in 1957, we construct a sample of cases where fast-growing economies slow down. The evidence suggests that rapidly growing economies slow down significantly, in the sense that the growth rate downshifts by at least 2 percentage points, when their per capita incomes reach around $17,000 US in year-2005 constant international prices, a level that China should achieve by or soon after 2015. Among our more provocative findings is that growth slowdowns are more likely in countries that maintain undervalued real exchange rates.

And the World Bank study notes that most economies in Latin America and the Middle East reached middle-income status as early as the 1960s and 1970s—and have remained there ever since. Of 101 middle-income economies in 1960, only 13 became high income by 2008: Equatorial Guinea; Greece; Hong Kong SAR, China; Ireland; Israel; Japan; Mauritius; Portugal; Puerto Rico; Republic of Korea; Singapore; Spain; and Taiwan, China.

 

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Categories:  Asia Pacific, Economic Policy, Foreign and Defense   |   Tags:

Kenneth P. Green

Did government create the shale gas boom?

By Kenneth P. Green

February 27, 2012, 4:57 pm

As I wrote in AEI’s online magazine The American, governments, and their supporters, are fond of pulling what I call a Ferris Bueller: seeing a parade pass by, they jump up on a float, sing loudly, dance vigorously, and then claim credit for the parade.

Or, as I told a talk-radio host who observed that oil and gas production has increased since Obama was elected, “Yes, well the date on the calendar has also advanced since Obama was elected, but that doesn’t mean Obama caused either to advance!” (We debunked the Obama-the-oil-producer claim here.)

Sadly, some otherwise pragmatic environmentalists (such as the guys from the Breakthrough Institute) are hopping up on the parade float and joining the Obama administration’s Twist and Shout, now claiming credit for having ushered in the boom in unconventional natural gas and oil coming from the nation’s heartland. In an email alert today, they say:

It wasn’t that long ago that the U.S. was cast as the global climate villain, refusing to sign the Kyoto accord while Europe implemented cap and trade.

But, as we note below in a new article for Yale360, a funny thing happened: U.S. emissions started going down in 2005 and are expected to decline further over the next decade, while Europe’s cap and trade system has had no measurable impact on emissions. Even the supposedly green Germany is moving back to coal.

Why? The reason is obvious: the U.S. is benefitting from the 30-year, government-funded technological revolution that massively increased the supply of unconventional natural gas, making it cheap even when compared to coal.

Alas, the reason for the natural gas boom is not nearly as obvious as the Breakthrough Boys make it out to be:

1) One winning game does not a champion make. Nordhaus and Shellenberger take the fracking example in isolation, and ignore persuasive literature showing that “industrial policy” (the formal term for government picking winners and losers) has a history of abject failure. Some, such as Terence Kealey at the University of Buckingham, point out that Japan’s efforts at industrial policy (through an agency called MITI) were simply a disaster.

2) Displacement is not addition. Studies show that government “investment” in applied research and development does not add new money to the pot, it displaces private capital, and does so disproportionally. When government steps in, it displaces more money than it throws in the pot.

Read the details here.

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Why Jonathan Chait should really stop writing about economics

By James Pethokoukis

February 27, 2012, 4:02 pm

New York magazine columnist Jonathan Chait doesn’t like Mitt Romney’s plan to cut taxes:

Supply-side economics is a theology immune from real-world revision. The significance of Romney’s announcement is that he is allying himself wholesale with the supply-side worldview.

Let me simply counter Chait with this analysis of supply-side economics from economic analyst Bruce Bartlett. See, Bartlett is an old Reaganite who now has found favor with liberals and the New York Times by a) calling for tax hikes and b) because he wrote a book called “The New American Economy: The Failure of Reaganomics and a New Way Forward” that actually—despite the title—shows Reaganomics was a huge success. I am guessing his new pals never read the book. Anyway, here is Bartlett:

Today, hardly any economist believes what the Keynesians believed in the 1970s and most accept the basic ideas of supply-side economics — that incentives matter, that high tax rates are bad for growth, and that inflation is fundamentally a monetary phenomenon. Consequently, there is no longer any meaningful difference between supply-side economics and mainstream economics.

There is no question in my mind that we never could have overcome the stagflation of the 1970s as quickly or with as little pain as we did without the supply-side idea. But supply-side economics has done its job, just as Keynesian economics did in the 1930s. Those who campaign as its champions are fighting a fight long won — and it is time for supply-side rhetoric to go, with its essential truths embodied in mainstream economics and its perversions discarded for good.

Supply-side economics is economics. But clearly Chait doesn’t know a whole lot about either.

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Categories:  Economic Policy, Fiscal Policy and Taxes   |   Tags: ,

Danielle Pletka

Marco Rubio on Syria

By Danielle Pletka

February 27, 2012, 3:36 pm

“If we stand by and say nothing…”

Kudos to Marco Rubio for a clear-headed and honest look at Syria and America’s obligations to people who seek freedom. He’s saying the right thing. He’s trying to get the administration to do the right thing.

Watch it all here.

 

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Categories:  Foreign and Defense, Uncategorized   |   Tags:

Marc Thiessen

Another Romney rich-guy gaffe

By Marc Thiessen

February 27, 2012, 3:36 pm

In today’s Washington Post, I write about how Republicans are blowing the class warfare fight. As if on cue to prove my point, enter Mitt Romney with this comment, courtesy of The Atlantic Wire:

During an appearance at Daytona’s International Speedway, Sunday, Mitt Romney tried to play the part of a NASCAR-loving regular Joe, but reminded voters what a clueless rich guy he is by saying, “I have some great friends who are NASCAR team owners,” according to an Associated Press report story. Of course, many people latched onto [the] quote. With AP reporter in tow, Romney spoke to both NASCAR VIPs privately and fans publicly about his love of cars and the city that makes cars, Detroit, ahead of the primary in Michigan this week, which Romney apparently has enough confidence he’ll win that he can manage an out-of-state campaign stop.

The full quote from Romney, when asked if he was a NASCAR fan, starts with an honest admission that he isn’t one. ”Not as closely as some of the most ardent fans. But I have some great friends that are NASCAR team owners.”

So to review, here are Romney’s top gaffes of the 2012 campaign … so far:

1.) “I drive a Mustang and a Chevy pickup truck.  Ann drives a couple of Cadillacs.” — February 24, announcing he owns four cars in speech at a near-empty Ford Field in impoverished Detroit.

2.) “I’m also unemployed.” — June 16, to Florida job-seekers.

3.) “Corporations are people, my friend.” — August 11, to hecklers at the Iowa State Fair.

4.) “Rick, I’ll tell you what, 10,000 bucks, $10,000 bet?” — December 10, to Rick Perry in the Sioux City debate.

5.) “I know what it’s like to worry whether you’re going to get fired.  There were a couple of times I wondered whether I was going to get a pink slip.” — January 8, Rochester, NH.

6.) “I’m not concerned about the very poor.” — February 1, CNN interview.

7.) “I like being able to fire people who provide services to me.” — January 9, New Hampshire.

And it’s only February.

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Larry Summers spills the beans on the real reason why Obama rejected Bowles-Simpson

By James Pethokoukis

February 27, 2012, 3:35 pm

President Obama created a debt commission—and then rejected its recommendations. As I just wrote in a previous post, the rejection was complete and overwhelming.

And here’s my theory why: The Bowles-Simpson commission recommended a) cutting individual tax rates to as low as 23 percent and b) capping federal spending and revenue at 21 percent of GDP. Keep that in mind as you read this bit from a new op-ed by former Obama economic adviser Larry Summers:

The combination of an aging society, rising health care costs, debt service costs that will skyrocket whenever interest rates normalize, a still-dangerous world in which our allies’ defense spending is falling even as that of potential adversaries rises rapidly, and a growing fraction of the population unable to hold steady work means that in all likelihood federal spending will need to be larger not smaller relative to GDP in the future.

Summers, the White House, and left-of-center economists everywhere believe federal spending will need to be much higher in the future. And consider that it is already 24 percent of GDP and would never go below 22 percent under Obama’s new budget. Obama—if he serves two terms—would be the first U.S. president in history to spend 22.0 percent or more of GDP for eight straight years (and then beyond). Indeed, three liberal think tanks recently constructed long-term budget plans, and their average projection for federal spending by 2035 was 25 percent of GDP—with a bullet.

Bottom line: Obama rejected Bowles-Simpson because it capped spending and taxes (both revenue and rates) at too low a level for the Big Government future he envisions.

Generating the revenue Obama would need to finance all his spending would require sharply higher taxes on the wealthy as well as, most likely, a value-added tax on everyone else. This also explains why we’ve never seen a long-term budget plan from the White House. If Team Obama did offer one, the American public would see that while tax hikes would start with “the rich,” they would eventually trickle down.

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Categories:  Economic Policy, Fiscal Policy and Taxes   |   Tags: , , , ,

Edward Pinto

The FHA and USDA divisions of Government Mortgage flunk the marshmallow test

By Edward Pinto

February 27, 2012, 3:04 pm

In a recent op-ed in the Wall Street Journal, Arthur Brooks observed out that President Obama’s budget fails the “Marshmallow Test.” In the test, children were offered one marshmallow now or a reward of a second one if they could wait 15 minutes before eating the first one. About two-thirds of the kids failed the experiment. Years later, the test subjects were evaluated and it was discovered that the children who could defer gratification tended to turn out well compared to those who couldn’t.

Arthur went on to observe that expanding government programs exist, “in no small part, to shove marshmallows into our collective mouth.” This has particular relevance for the government agencies that constitute Government Mortgage (Fannie, Freddie, the FHA, the USDA, Ginnie Mae, and the VA). Fannie and Freddie (prior to their bailouts) and the FHA and USDA today flunk the marshmallow test. They promote lending that eliminates the need to show the discipline to defer instant gratification for a long term goal. In 2010, the FHA, the VA, and the USDA accounted for 55 percent of all owner-occupied home purchase loans, with the preponderance of their loans having either no down payment or a minimal one. Today, the FHA and the USDA each have a delinquency rate that approaches one in five guaranteed loans.

When it comes to shoving marshmallows into borrowers’ mouths, the USDA’s single-family guarantee program is hard to beat. A borrower with a FICO score of 580 (a score in the bottom top ten per cent of all scores) is able to get a zero down loan guaranteed by the USDA (or similar loan insured by the FHA). The all-in cost of the USDA loan is at least $12,000 below what Freddie Mac would require for the same loan of $150,000. Except that the USDA loan is too risky for Freddie because about one in three would be expected to fail. Thanks to the government substituting marshmallows for discipline, this same borrower would pay an all-in cost that is a mere $1,500 more than a prime borrower with a 740 FICO (a score in the top forty-three percent of all  FICO scores) and a 25 percent down payment. Government Mortgage must be reined in before it is too late.

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Did Obama actually embrace Bowles-Simpson? Please

By James Pethokoukis

February 27, 2012, 2:43 pm

The New York Times reports some important budget news you may have missed. Apparently, writes ace reporter Jackie Calmes, President Obama has actually embraced the recommendations of his own debt commission. Well, pretty much.

This is shocking. I, like many observers, thought Obama more or less blew off the panel chaired by Erskine Bowles and Alan Simpson when it released its big proposal in December 2010. But Calmes explains the reality is just the opposite:

 … Mr. Obama has come to adopt most of the major tenets supported by a majority of the commission’s members, though his proposals do not go as far. He has called for cutting deficits more than $4 trillion over 10 years by shaving all spending, including for the military, Medicare and Social Security; overhauling the tax code to raise revenues and lower rates; and writing rules to lock in savings.

But he did so months after the commission’s report in December 2010, and largely without acknowledging that he was borrowing from its recommendations. That caution reflected White House concerns about liberals’ hostility to the plan and, aides say, Mr. Obama’s certainty that Republicans would reject anything he endorsed.

Now here are the key goals of the report from the National Commission on Fiscal Responsibility and Reform. Let’s see if the president has tried making them happen:

1. Bowles-Simpson: Achieve nearly $4 trillion in deficit reduction through 2020, more than any effort in the nation’s history. 

Did Obama do it? No. The White House says its budget gets $4.3 trillion in savings through 2021. But the bipartisan Committee for Responsible Federal Budget says Obama’s budget “falls well short of the $4 trillion in savings claimed by the Fiscal Commission. ”

See, to achieve that illusory $4.3 trillion in savings  Obama performs the following budgetary tricks:

– counts $1.6 trillion (excluding interest) of already-enacted savings.

– includes two elements which the Fiscal Commission assumed in its baseline – a drawdown of the wars ($740 billion through 2021) and the expiration of the upper-income tax cuts ($830 billion through 2021).

If the Bowles-Simpson plan were scored the same way as the President’s $4.3 trillion, the CRFB estimate it would save roughly $6.5 trillion through 2021. Compared to CRFB’s “realistic baseline, Obama’s budget would save nearly $2 trillion through 2022. Relative to CBO’s current law baseline, on the other hand, it would increase deficits by more than $4.2 trillion.

2. Bowles-Simpson: Reduce the deficit to 2.3% of GDP by 2015 (2.4% excluding Social Security reform).

Did Obama do it? No. Obama’s new budget would reduce the deficit to just 3.4% of GDP by 2015 — even with a rosy economic growth forecast. In fact, Obama would never get the deficit below 2.7% of GDP.

3. Bowles-Simpson: Sharply reduce tax rates, abolish the AMT, and cut backdoor spending in the tax code.

Did Obama do it? No.  On income taxes, Bowles-Simpson would lower the top marginal rate to between 23% and 29%. Obama wants to raise the top rate to 40%. And while Obama puts the elimination of the AMT as a goal in his most recent budget, he doesn’t actually propose doing it. Indeed, he proposes a new 30% AMT — the Buffett Rule — for high-income taxpayers. As for “backdoor” spending, Obama would cut some business tax breaks but expand others. He has not proposed tax simplification of the personal tax code.

4. Bowles-Simpson: Cap revenue at 21% of GDP and get spending below 22% and eventually to 21%.

Did Obama do it? No.  Spending never falls before 22.2% of GDP in Obama’s budget. And Obama certainly doesn’t place a cap on spending.

5.  Bowles-Simpson: Ensure lasting Social Security solvency, prevent the projected 22% cuts to come in 2037, reduce elderly poverty, and distribute the burden fairly.

Did Obama do it. No.  The White House has not proposed Social Security reform –  or, really, any long-term entitlement reform. Here is what Treasury Secretary Tim Geithner told House Budget Committee Chairman Paul Ryan last week: “We’re not coming before you to say we have a definitive solution to that long-term problem. What we do know is we don’t like yours.”

6. Bowles-Simpson: Stabilize debt by 2014 and reduce debt to 60% of GDP by 2023 and 40% by 2035.

Did Obama do it? No. Obama’s budget has debt/GDP at 76.5% in 2022, while the CRFB calculates it at 80 percent. And again, Team Obama has not proposed a long-term plan to reduce the national debt to sustainable levels.

As I score things, Obama has failed — or not even attempted —  all six on his fiscal commission’s goals. That’s 0 for 6. The collar. Obama embraced Bowles-Simpson? Sure. And Oceania has always been at war with Eurasia …

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