The Wrongologist

What’s
Wrong Today:

“Don’t tax you. Don’t tax me. Tax that
fellow behind the tree.” –Louisiana Senator Russell Long.

 From
Barry Ritholtz’s Big Picture Blog:

Is this the
way to run our country?

Ritholtz
suggests an alternative approach is to apply game theory to resolve spending
and tax issues. Game theory studies strategic decision making, how conflict
and cooperation between decision-makers leads to certain outcomes.

Game
theory might help us with these issues. How?
By stopping the taxing and spending cuts of that fellow behind the tree and instead, forcing
people to raise their own taxes and cut their own spending.

How would
this work? We would have to change the budget process: The president would
establish  spending and taxation goals
and the House, which is responsible for passing the budget would set up 50 state working groups to decide
how the federal revenues, benefits and expenses that flow to their own state would be spent/cut.

The state
working groups would determine their state’s priorities. If they want to do
polls or surveys, to get input, fine. They would get no budget for doing this;
it comes out of their own congressional staff budgets.

Now, it
becomes difficult to aim at the guy behind the tree. Each state delegation would
determine their residents’ fate. And they would get the reward, or pay the
price at the ballot box every other November.

Let the
CBO determine how much money should flow to each state from the Federal
Government. This would include Social Security and Medicare, spending on
Education, and other financing, like FEMA.

We would
quickly discover which priorities the people in each state have for government
spending, and also the priorities of their elected representatives: Don’t like
military spending? Cut it in your own state. Against Social Security? Cut aid
to the elders in your own state. Have a problem with FEMA? Opt out of it.

This would
force legislators to make real sacrifices, not like today where they cut things
that impact other groups or people. It eliminates the hypocrisy of the deficit
peacocks that vote for budget busters and then disingenuously present
themselves as concerned about our debt.

For example, five
states comprise the Tea Party Homeland. They are: Alabama,
Georgia, Louisiana, Mississippi and Texas. Each receives more from the federal
government than it pays to it in taxes and other revenues. All of these states
voted for Mitt Romney by big margins and contribute a healthy share of the Tea
Party members now in Congress.

The Tea Party is working hard to cut
federal spending.
 And they are following the Sen. Long
mantra: Government workers, social safety net programs, defense workers,
schools, environmental programs, Big Bird, all will feel the lash of the Tea
Party’s intransigence. 

The ongoing
polarization surrounding the Sequester, the debt limit and the deficit is not your
normal political drama that gets resolved at the last minute. 

It represents the
apogee of Tea Party anger and cynicism. 

The
biggest problem we have in our political process is that Congress critters have no individual accountability: There
are no effective checks on their votes or on Congress’ decision making. We
learn in school that the democratic process works, that we can vote out a
politician that doesn’t represent us in the manner we need. That’s only true in
theory. Incumbents rule in Congress. And while the national average is about one
congressperson per 800,000 voters, many in largely rural states have outsized power.

Congress is a protected class under the
Constitution.
They decide their own compensation and behavior. When they saw that presidents
could pose a threat to their rule, they modified the Constitution to include
term limits — but only on the president. And the Constitution specifies rather
clearly that the power to tax and spend lies solely with the Congress.

All the
noise about what Mr. Obama or any president can do is simply that: Noise. Congress
holds all the cards.

The risk with using game theory to drive individual state deficit cutting is that, given the federal structure of the Constitution, an
appropriations law that results in lower per capita federal appropriations for
health care for the elderly in State A might be vulnerable to attack on constitutional
grounds, regardless of an endorsement by their local congressmen.

Another concern
is the problem of funding the commons: Watersheds cross state lines, air
pollution respects no boundaries. Much of federal spending is not state
specific: Consider defense, infrastructure, foreign affairs, or regulation of
financial markets.

Finally, game theory works when the participants are rational.
Unfortunately our political system (the Tea Party in particular) has descended
into a black hole of weirdness.

But, let’s
see if 50 state level deficit cutting workshops can help solve the great
political problem of our time.

Nothing
else is working.

What’s
Wrong Today:

Everything and every
attitude is the subject of polling in America. The reason for that is as a
people, we really agree on very little. So, the Wrongologist passes along the
results of a telephone survey conducted by Public Policy Polling (PPP),
regarding the foods and food organizations Americans prefer. (Hat tip
to Linda, a Wrongologist subscriber)

PPP was ranked by the
Wall Street Journal as one of the top
swing state pollsters and did better than the New York Times’ 538.com and its super geek, Nate Silver. 

You will see in the
press release below that Americans picked Ronald McDonald over the Burger King for
President, 36% to 22%, but happily, 42% were not sure. Would Ronald be worse
for the country than John Boehner? After all, both are clowns with red noses.

Apparently, Marco
Rubio’s and Hillary Clinton’s presidential ambitions are safe for the moment.

Here is PPP’s press
release: (emphasis by the Wrongologist)

PPP surveyed 500
registered American voters from February 21st to 24th. The margin of error for
the overall sample is +/-4.4%.

PPP surveys are
conducted through automated telephone interviews.

What’s’
Wrong Today:

It appears
that there is reason to be pessimistic about the future production potential of oil
and gas from US shale formations. These are the sources of energy that come
from hydraulic
fracturing,
(“fracking”) a technique used to release petroleum and natural gas. This
technique creates fractures from a wellbore drilled into
reservoir rock formations.

So,
What’s Wrong?

That isn’t
what we have been told.

Analysts
have provided optimistic assessments of the future production potential of US
shale or tight oil. For example, the International
Energy Agency
recently predicted that the US would be producing over 10 million barrels per
day of oil and natural gas liquids by 2020 before resuming a gradual decline.

This has gotten lots of
publicity:

In the 2012
State of the Union, Mr.
Obama said:

Ed Morse,
Global Head of Commodities Research at Citigroup:

Fatih
Birol, Chief Economist at the International Energy Agency:

Two reports
published at ShaleBubble.org challenge
this outlook. The reports are by the Post Carbon Institute (PCI) and by the Energy
Policy Forum
(EPF). The reports conclude that the fracking boom could be lead to another Wall Street bubble.

Media
attention about fracking has been focused on the threats to drinking water and
health in communities throughout North America and the world, but the data in
these two reports indicate that there could also be a different threat.  

The
fracking industry bubble could be similar to the housing bubble.

In other
words, fracking could tank the economy.

Sez
who?

PCI’s
report is titled “Drill
Baby, Drill,”
authored by J.
David Hughes,
while EPF’s report is titled “Shale Gas and Wall Street,” authored by
EPF Director and former Wall Street financial analyst Deborah Rogers.

Hughes
concludes that the “100 years” claim is wrong, and at current production rates,
there are at best, 25 years under the surface.

Really?

Industry
proponents rely on a figure known as “technically
recoverable reserves”
when they promote the potential of shale basins. The figure that actually
matters is production rates,
or what the wells actually pull from reserves after fracking.

In the
case of US shale gas, the booked reserves are operating on what Hughes coins a
“drilling treadmill,” and exhibit diminishing returns. Hughes analyzed the
industry’s production data for 65,000 wells in 31 shale basins nationwide,
utilizing the DI
Desktop/HPDI database,
widely used both by the industry and the US government.

Hughes sums
up what he discovered: (emphasis by the Wrongologist)

The reality
is that five shale gas basins
currently produce 80% of the US shale gas and on a steady state “same wells” basis, those five are already in production
rate decline.

What
about shale oil as opposed to shale gas?

Shale oil
is also known as “tight oil”. Over 80% of the oil produced and marketed from
shale comes from two basins: Texas’
Eagle Ford Shale
and North
Dakota’s Bakken Shale.
Hughes writes: (emphasis by the Wrongologist)

At current
production rates, Hughes concludes, there are 5 billion barrels of shale oil
located underneath Bakken and Eagle Ford, which equates to just ten months worth of current
US consumption of oil at current consumption
rates.

The most
successful shale US oil-producing field is the Bakken in North Dakota and
Montana, which currently accounts for 42% of the US tight oil total. Hughes
finds that once output from a typical Bakken well begins to decline, within 24
months its production flow is down to 1/5 the level achieved at its peak.

Check out
this graph from Hughes of flow from a typical Bakken well:

Source: David Hughes

Given this
rate of decline on existing wells, it is a straightforward exercise to answer
the question: Suppose that no new wells were drilled after 2010. What would the
path of Bakken oil production then look like? Hughes did this analysis:

Source: David Hughes

Increasing
annual production requires not just new wells but an increasing number of new
wells each year; Hughes estimates that
820 new wells are needed each year just to offset Bakken field decline.
But since only a few wells in the Bakken have proven to be very productive, average
well productivity is much lower. A limited number of lucrative sweet spots account
for much of the success so far, so even more drilling is required just to stay even.

This makes
achieving the IEA projection difficult and means a much more rapid decline in
the production rate after the peak is reached, than forecasted by the industry.

Wall Street’s Plans for Shale

Deborah Rogers
may also open your eyes with her report.
She is a member of the US Extractive Industries Transparency Initiative
(USEITI), an advisory committee within the Department of Interior. She also
served on the Advisory Council for the Federal Reserve Bank of Dallas from
2008-2011.

Her
reporting indicates that there are two types of questionable economics
unfolding: The day-to-day shale oil and gas production economics and Wall
Street’s high finance economics.

On Wall
Street, investors’ needs are driving the economic decisions of those working in
the field, in what Rogers describes as a “financial
co-dependency.”

She
writes: (emphasis by the Wrongologist)

Yes, she did say: just
like in the real estate bubble. Rogers shows that Wall Street firms
are now married to the shale gas and oil corporations, with Wall Street
analysts acting as promoters of shale gas and oil deals to investors. Here
are the conclusions of her report:

• Wall Street promotion drove high levels of shale
  gas drilling

• Overproduction by operators was driven by the
  need to meet financial analysts’ targets of production growth

• It artificially lowered the price of natural gas

• The industry is now dragging its feet on further
  shale investment, abandoning pipeline projects, IPOs and joint venture projects
  

In
Conclusion:

Could we
be witnessing another Inside Job of the sort
Charles Ferguson portrayed in his Academy Award-winning documentary film?

Check out Matt
Taibbi’s work  on Wall Street’s prior bubbles: The
Great American Bubble Machine.

Things are
getting zesty again on Wall Street. If shale oil hits the fan,
we can’t say we weren’t warned.

Sunday Cartoon Blogging at the Church of Wrongology:

What’s
Wrong Today?

Most of
the current Sequester discussion concerns who owns it, not what Congress should
do to solve yet another manufactured fiscal crisis.

Republicans
say Mr. Obama owns the Sequester. Democrats say Republicans voted for it too. The
Sequester was part of the 2011 Budget Control Act. In the House, votes were:
174 Republicans for it to 66 against. Democrats were split, 95-95. In the
Senate, 28 Republicans voted for it to 19 against, while D’s supported it 45-6.

You don’t care if it is Obama’s Sequester or Boehner’s Sequester. You want them
to come to an agreement.

OMG! Is
the sky falling?

If the
Sequester is activated on March 1, 2013, will our government disintegrate?

The Obama
administration, many pundits and some Republicans are warning of mass
government layoffs and services collapsing when “Sequestration”
begins in a few days, unless our gridlocked government finds a way to
circumvent the start of the $85 billion in federal budget cuts (of a $3.6
trillion budget).

Get a grip, that’s only 2.6% of the budget, folks.

Also, the
full force of the $85 billion of cuts will
take several months to be felt, said White House budget office
controller Danny Werfel:

Under the
law, retirees are shielded, so Social Security checks will arrive on schedule
at the beginning of March and every month thereafter. Similarly, the elderly
and the disabled will not see Medicare healthcare curtailed at all over the
seven months.

Every US soldier
will get paid and the Defense Department will be allowed to shift funds to
ensure that combat operations and “critical military readiness
capabilities” are not degraded, according to the Obama administration.

The
Wrongologist wrote
last fall that the Sequester would not throw us into recession:

What
are the politics?

Republicans have decided that the Sequester,
rather than the government-funding bill due at the end of March is where
they’ll make their stand on spending cuts, The
Hill’s Alexander Bolton reports:

So, a year which
began with multiple “trigger points” for a Republican-generated meltdown—the
debt limit, the Sequester and the continuing resolution—we are down to just the
Sequester.

GOP leaders see the Sequester
as the political inverse of the fiscal cliff. Republicans felt they had little
choice at the end of 2012 but to agree to tax increases because if they did not
compromise, all of the Bush-era tax rates would have expired.

While Republicans
want to avoid cuts to military spending, the thinking is that Democrats are
more eager to spare social programs from across-the-board reductions. 

Where’s
Obama?

So far, he is holding
fast to a “no negotiating without tax increases” position.

According to Bloomberg
and their national poll conducted on Feb. 15-18, Mr. Obama enters the Sequester
showdown with his highest job approval rating in three years and public support
for his economic message, while his Republican opponents’ popularity stand at a
record low.

55% of Americans
approve of Obama’s performance in office, his strongest level of support since
September 2009 while only 35% of the country has a favorable view of the Republican
Party, its lowest rating in this survey that began in September 2009. The Republican
party has slipped six percentage points in the last six months, the poll shows.

Some Democrats
are worried that Republicans will move a bill to simply restore the Defense
spending, putting the Democrats in a tough spot. That way, the argument goes,
the Republicans could either restore the Defense cuts, or blame Democrats and
the president for it, and in either case, still blame the economic stress
resulting from the domestic cuts on the president and the Democrats.

But, if Republicans had the votes to pass a bill that averts cuts in
defense, they would already have voted on that. The reason they didn’t is either they do not have the
votes or know that the politics of dropping just the defense part of the Sequester
is bad for them.

Where’s
Boehner?

Mr.
Boehner painted Mr. Obama with the blame brush for the Sequester on Wednesday in
the Wall
Street Journal:

Is Mr.
Boehner against the Sequester? Sounds like it. He also comments on the Fiscal
Cliff deal:

Wow! This
sounds like a guy who has no intention of compromise.

But, in the
right-leaning Washington Examiner, Byron
York wonders if Mr. Boehner’s WSJ article delivers the wrong message:

Last week, Boehner
told the Associated
Press that the Sequester was a disaster that would present him and his
members with nothing but bleak options if it went into effect. He must know that
the Sequester is a political loser that won’t get the Republicans any leverage.
So why is he playing along?

Politico had a piece
on January 13th that indicated that GOP officials said more than
half of their members are prepared to allow default unless Obama agrees to the dramatic
cuts he has repeatedly said he opposes.

They quote an unnamed
GOP leadership adviser:

It seems like Speaker
Boehner will let the Sequester kick in for “member-management” purposes. So, Boehner
points a gun to his own head and says:

“Be
careful! When I blow my brains out, you Democrats are gonna get blood all over
your shirt!”

What’s
Wrong Today:

Yesterday,
we discussed the Deficit Hawks and the Republicans’ viewpoint that America
doesn’t need more tax revenues in order to reduce and eventually eliminate the
Deficit. Most who are not captured by corporate
lobbyists understand that lower corporate taxes have not provided
either more jobs, or more revenue to help support the commons.

Our
society works best if those who enjoy its benefits are also prepared to pay
their share of the costs. The chart below shows that individuals have
paid about the same percentage of total federal revenues since the 1930’s,
while corporations’ share has fallen dramatically:

This chart
shows that corporate tax receipts declined approximately 50% (as a percentage
of GDP) from roughly 4.8% in 1959 to 2.4% in 2011.

And the
chart below
shows the decline of corporate tax receipts (as a percentage of corporate
profits) from 77% in 1959 to roughly 25% in 2011.

Corporate tax avoidance has become an
epidemic in America. It is the result of allowing lobbyists to draft our
tax regulations. All taxpayers play by the rules as written. Aside from
outright tax evasion and money laundering, which is illegal, tax minimization
within legal boundaries is perfectly rational. Companies would not willingly
pay more taxes and earn a lower return on capital than they do today without a
fight.

What is
avoidance worth?

In July,
2012, the Tax Justice Network released an updated version of a report showing that $21 trillion
and possibly as much as $32 trillion have been siphoned out of the global economy
into tax shelters. According to The BBC,
the low-end
figure is equivalent to the size of the US and Japanese economies combined. The
Economist reports that: (emphasis by the
Wrongologist)

Yesterday,
we reported that Apple, Inc. represented $83 billion of that $21 trillion. Let’s
take a closer look at Apple’s tax avoidance strategies:

Apple’s
state tax avoidance

According
to the New York Times, Apple uses a
small office in Reno Nev. to avoid millions of dollars in state taxes in
California and 20 other states. Although Apple’s headquarters are in Cupertino,
CA, its Reno office, 200 miles away, collects and invests much of the company’s
profits, allowing Apple to avoid state income taxes. California’s corporate tax
rate is 8.84% while Nevada’s is zero.

Setting up
an office in Reno is just one of many legal methods Apple uses to reduce its
worldwide tax bill by billions of dollars each year. In 2006, Apple established
a Nevada subsidiary named Braeburn Capital to manage and invest the company’s
cash.

Braeburn
is a variety of apple that is simultaneously sweet and tart.

Whenever
someone in the United States buys an Apple product, a portion of the profits
from that sale is deposited into accounts controlled by Braeburn and then
invested in stocks, bonds or other financial instruments. Those profits are shielded
from tax authorities in California by virtue of Braeburn’s Nevada domicile. Nevada
has no state corporate income tax and no capital gains tax

Since
founding Braeburn, Apple has earned more than $2.5 billion in interest and
dividend income on its cash reserves and investments around the globe. What’s more,
Braeburn allows Apple to lower its taxes in 20 other states, because those
jurisdictions use formulas that reduce what is owed when a company’s financial
management occurs elsewhere.

Apple’s
global tax strategy

While
Apple’s Reno office helps the company avoid state taxes, its international
subsidiaries and the company’s assignment of sales and patent royalties to
other nations, help reduce taxes owed to the American and other governments.

For
instance, Apple’s subsidiary in Luxembourg, named iTunes S.à r.l., controls global
iTunes sales.

Luxembourg
has just half a million residents, but when customers across Europe, Africa or
the Middle East download a song, television show or app, the sale is recorded
in Luxembourg.

In 2011, iTunes S.à r.l.’s revenue exceeded
$1 billion, representing roughly 20% of iTunes’s worldwide sales.

The reason
is simple. Luxembourg taxes the payments collected by Apple and numerous other
tech corporations at very low rates if they route transactions through their
country. Taxes that would have otherwise gone to the governments of Britain,
France, the United States and dozens of other nations go to Luxembourg instead,
at discounted rates.

Downloadable
goods illustrate how government tax systems are increasingly ill equipped for tracking
sales in an economy dominated by electronic commerce.

In the
1980s, Apple was among the first major corporations to designate overseas
distributors as “commissionaires,” rather than retailers.  Since commissionaires never technically take
possession of inventory — which would require them to recognize taxes — the
structure allows a salesman in high-tax Germany, for example, to sell computers
on behalf of a subsidiary in low-tax Singapore.

Hence, those
profits would be taxed at Singaporean, rather than at German, rates.

The
“Double Irish”

In the
late 1980s, Apple used a tax structure, known as the “Double Irish” to move
profits into tax havens around the world. Apple created two Irish subsidiaries,
named Apple Operations International and Apple Sales International. 

The arrangement
allowed Apple to move ownership of patents developed in California to Ireland.
That allowed patent royalties due to move to the Irish subsidiary. As a result,
profits were taxed at the Irish rate of approximately 12.5%, rather than at the
American statutory rate of 35%. By 2004, Ireland, a nation of less than 5
million, was home to more than
one-third of Apple’s worldwide revenues, according to company filings.
(Apple has not released more recent figures)

Moreover,
the second Irish subsidiary, the “Double”, allowed other profits to flow to
tax-free companies in the Caribbean. Apple assigned partial ownership of its
Irish subsidiaries to Baldwin Holdings
Unlimited in the British Virgin Islands, a tax haven.

Baldwin
apples are known for their hardiness while traveling.

Finally,
because of Ireland’s treaties with European nations, some of Apple’s profits
could travel virtually tax-free through the Netherlands (the “Dutch Sandwich”)
which made them essentially invisible to outside observers and tax authorities.

These
strategies help explain how Apple has managed to keep its international taxes
to 1.9% on its earnings outside the US in its last fiscal year, according to a
regulatory filing by the company. They had $713 million in tax on foreign
earnings of $36.8 billion in the fiscal year ended Sept. 29.

Without
such tactics, Apple’s federal tax bill in the United States most likely would
have been $2.4 billion higher last year, according to a recent study by a former Treasury Department economist,
Martin A. Sullivan. Mr. Sullivan said:

Apple isn’t the enemy here, Congress is.

Our tax
systems must be reformed. We need to take that job away from corporate lobbyists. We must make it harder for companies to use
internal (“transfer”) pricing to avoid tax. Companies should be made to book
activity where it actually takes place.

Any new
system needs to ensure that change results in corporations paying more in taxes
with less collection/compliance expenses. The new system must be simpler than
today’s.

Make it simple. More complexity creates
more avoidance opportunities.

If we can’t make our lawmakers reform the tax code and drastically reduce avoidance,
then we should just keep quiet, pay our taxes, accept the need for austerity,
help out our banks when they are in need, and most importantly, vote for the
Deficit Hawks in our next election and let them look after our best interests.

 

What’s
Wrong Today:

The deficit
hawks have taken flight once again.

We see
that the serious newspapers can’t stop giving space to the deficit hawks. Two
very serious examples are from two very serious people, Tom Friedman in the NYT
and the editorial board of the Washington
Post.

First,
Mr. Friedman:

The siren song of the uncertainty meme
was just too strong for Tom Friedman on Sunday, as he ruminated
on Mr. Obama’s SOTU speech. Last Sunday, in another Fried-tastic column, he said: (emphasis by the Wrongologist)

Have a claim you’re too
lazy to substantiate? Just preface it with “I’ll bet anything that
…” and presto, you too can be Tom Friedman!

Data
might help Mr. Friedman see that current investment in equipment and software
is actually reasonably healthy. Measured as a share of GDP it is almost back to
its pre-recession level. Furthermore, apart from the tech bubble days of the
late 90s, it has never been much higher than it is today. Here’s the picture
from the BEA:

In short,
there is no reason to expect investment to be much higher than it is. The peak in the graph was during Y2K. It
doesn’t appear that uncertainty is very important to investment.

What
about corporate investing?

Let’s
consider Apple Inc. (NASDAQ: AAPL): Like other big companies, Apple leaves a
lot of its cash overseas. If it brought it home to the US, it would have to pay
US corporate taxes on the money.

The cash that Apple
has overseas is a stunning $82.6 billion.


Apple paid an income tax rate of only 1.9% on its earnings outside the US in
its latest fiscal year, according to a regulatory filing by the company. They had
$713 million in tax on foreign earnings of $36.8 billion in the fiscal year ended
Sept. 29.

Rather
than repatriating more of its foreign earnings, Apple is lobbying to change US
law so that it can erase its liabilities through a tax holiday that will allow
it to bring home cash at a lower tax burden than it would currently pay.


Get this: Where does AAPL invest all of this foreign cash? The vast majority is
invested in US government securities, and
the earnings on those investments are tax-free in the US.

It
is clear that uncertainty hasn’t stopped Apple from purchasing US government securities.

Next,
WaPo:

The WaPo
had another in its series of editorials warning against
any complacency in our efforts to stabilize the debt:

We need to
differentiate between “stabilizing” our deficit and “eliminating” our deficit. This
is the crux of the difference between the parties on the Sequester and the
deficit.

• Democrats
  want to stabilize the deficit and let a slowly growing economy gradually unwind
  our debt position over a couple of decades

• Republicans
  want to eliminate the deficit within a decade and unwind our debt position more
  rapidly

WaPo’s
view that deficit reduction is more urgent than Mr. Obama thinks is both dangerous and naive: Today’s
Congress simply can’t be trusted to achieve deficit savings in a way that’s
compatible with either growth or smart governance.

Many in
Congress are driven by deep ideological opposition to government. They remain in
deficit-freak-out mode in order to slash and burn the social safety net. They
are pushing balanced budget amendments that could rob the federal government of
counter-cyclical policy tools or force massive sequesters.

They argue
for spending caps that have no reference to the nation’s needs going forward.
 

Arguments
like WaPo’s simply throw fuel on the  Hawk’s fire.

Consider
an analogy:
There is a dam outside your city that is owned and operated by the city. The
dam is essential for flood prevention, electricity generation and providing the
city with its water supply. But it is in bad repair and crumbling, and every
year the city’s dam maintenance expenditures have been going up.

Ultimately,
the city will either have to spend a lot of money in a short period of time to
repair the dam for good, or else accept mounting annual maintenance costs that
over the long run will cost much more than the one-time repair.

A city
councilman says, “We have to do something about this dam problem! We must
reduce our dam maintenance budget!” It would be obvious to everyone that
simply reducing the maintenance budget will not solve the
problem.

Deciding not to spend money to address a
growing problem is not the same thing as fixing that problem.

Citizens know
that the dam problem isn’t fixed simply by selling the dam to a private utility
company. The utility will charge the people of the city higher water and
electric rates, so the citizens pay either way. Shifting the cost from the
public’s tax bills, payable to the city, to the citizens’ water bills payable
to a private company does nothing for the taxpayer.

It’s dishonest
to say about any problem, “We have to
reduce the public commitment, because the government will never be able to
afford this”, while saying with the same breath that the whole society can
afford it.

The debate
about public provision vs. private provision, regardless of whether we are
talking about the Postal Service or a local dam, is a debate about delivery mechanisms,
not about affordability.

A little
strategic thinking could go a long way right now. Some advice to the WaPo and
the NYT: Consider our economy today–

• Is
  there a lack of demand? Yes

• Are
  people saving? No

• Is
  private investment high? Reasonably so

Isn’t it also
true that only an ideologue would
say you can make progress on the deficit without a strong economy?

Note to
Mr. Friedman:

• If
  we aren’t saving but we are investing, then weak demand must be a function of weak personal
  income

• Why
  is personal income weak? Not enough people are working, so our entire focus
  should be on getting people back to work

Message
to WaPo and the New York Times: Write a column listing ten ways to eliminate
unemployment.

 

Cartoons of the Week

What’s
Wrong Today:

The news
media are obsessed with the Deficit. According to Bloomberg,
The Washington Post has run 2,310
separate stories including the word “deficit” over the past year.

That’s one deficit story for every 10 that the
newspaper publishes in its front and opinion sections. Is it the job of the
media to confuse or inform? Does this mean anybody actually cares?

Democrats
and Republicans say the deficit is a big problem:

• Mitch
  McConnell calls it “The
  transcendent issue of our time”

• Senator
  Marco Rubio, who delivered the Republican response to Obama’s State of the
  Union address, called it “our
  nation’s greatest challenge.”

• “Simply
  immoral,” said Mitt Romney

• “We
  have a budget deficit problem that we have to address,“ said Nancy Pelosi

How do
they plan to solve “the problem”?

Not with
tax revenue, John Boehner has said.
Not by cutting defense spending, Sen. John McCain insists.

Republicans
are so concerned about the deficit that they’re prepared to offer…not a single major policy concession to
address it.

Democrats
aren’t much better. Consider House Minority Leader Nancy Pelosi’s recent
interview on Fox News, where she said that is was “almost a false argument” that
the federal government has a spending problem.

Very few in
Washington care about the federal government’s budget deficit. Deficit talk is a
decoy for the unpopular components of both parties’ larger
political agendas. What’s really going on is a debate about the proper size and role of government.
 

Washington
is using the budget shortfall as a proxy for policies to expand or contract the
federal government. So, instead of talking mainly about tax increases or cuts
to government services, both parties
disguise the real issue by feigning concern about deficits.

The Economist reports
that Mr. Obama is closer to solving America’s growing debt than many think:

That projection
assumes that Mr. Obama and Congress do not override planned spending cuts and
tax rises, most importantly the “Sequester”. The Sequester mandates $1.1
trillion of additional spending cuts over the next ten years, including $85
billion-worth this year that are due to begin on March 1st after being put off
for two months. Even if those measures are overridden, the CBO still predicts
that the deficit will fall to 5.5% this year and 3.7% of GDP by 2015.
Thereafter, though, it will start to rise again.

As the Wrongologist reported
earlier this week, Mr. Obama and Congress struck two deals in 2011 that cut
spending and one at the start of this year that raised taxes.

Cumulatively, these
three deals have already cut a projected $2.4 trillion from deficits over the
coming decade, or a little over 1% of GDP, according to the Committee for a
Responsible Federal Budget, a watchdog group (see the Economist’s table
below)

That won’t be enough
to stabilize the publicly held debt as a share of GDP. The CBO says this will
climb to 87% of GDP in 2023, compared with 73% now, if the Sequester spending cuts do not occur or
if popular tax breaks are extended.

Yet this papers over
a more worrying reality.

America’s budget
classifies spending as either mandatory, which means it does not have to be authorized
each year by Congress, or discretionary, which means it does. Most of the
long-term pressure on the deficit comes from mandatory spending, in particular
the big Social Safety Net programs—Social Security, Medicaid and Medicare (see
chart from Economist below).

The spending cuts to date have fallen almost
entirely on discretionary spending, putting both defense and domestic
discretionary spending on track to fall steadily as a share of GDP. The Sequester
accelerates that, driving both below 3% of GDP by 2020 from more than 4% last
year.

Cutting discretionary
spending is politically appealing because it arouses less anger than cutting the
Social Safety Net or raising taxes, and because the specifics are negotiated by
Congress each year. Cutting just discretionary spending is hardly ideal for the
economy. Relentless downward pressure on discretionary spending could also
hamper the government’s ability to do its job, in both defense (see this
Economist article) and the
civilian economy.

We know that the two parties
disagree on how entitlements ought to be reformed. Republicans believe benefits have to be limited by converting
Medicare to a voucher system and limiting Medicare funding. Democrats prefer to
curb fees to drug companies and hospitals and experiment with different ways of
delivering care.

To replace the Sequester,
House Democrats have proposed higher tax rates for the rich and for oil
companies, while trimming farm subsidies.

Republicans
dismiss such plans. Republicans
want to cut public pensions and healthcare. Paul Ryan, chairman of the House Budget Committee, plans to
present a Republican budget that he says will balance the budget in a decade, presumably
with far more radical cuts to entitlements than Democrats can tolerate.

And
in conclusion:

The
Deficit is not the main issue today. Unemployment and underemployment are! (see the Wrongologist here)

They reduce demand,
stifling economic growth and lowering tax receipts. If we can get out of the hole and
prosperity returns to most, not just to the 1%, we will have plenty of time and
opportunity to address deficits and debt fundamentally.

Politicians
must look at the real problems and stop touting ideas to transfer even more of
the nation’s wealth from the middle class to the 1%. Banksters are thriving,
corporate profits are returning to record highs, the middle class is still
hurting, the poor are suffering and the
Washington Post is worried about? Deficits.

Is destroying
Social Security so necessary to right wing ideology that they can continue ignoring
these facts?

If you
repeat “Deficit” often enough and loud enough, do they think people will
believe it?

What’s Wrong Today:

Sen. Chuck Hagel just
missed clearing the 60-vote bar for confirmation today. The finally tally was
58-40, with one senator voting present. For procedural reasons, Democratic
Leader Harry Reid switched his vote to “no” at the last minute, a
routine move that allows him to bring up the vote again later on. 

The battle on the
floor of the Senate Thursday was historic. The Senate has never successfully
filibustered a Cabinet secretary. Only two previous Cabinet officials required
60 votes before confirmation, and this has never happened for a Defense
secretary nominee. Democrats hold a 55-45 edge in the Senate and have the
numbers to confirm Mr. Hagel on a majority vote, if allowed to get to that
point. 

It has
become increasingly evident the past few days that opposition to Mr. Hagel has become
a reason for Republicans to dredge up other issues such as Benghazi.

Josh
Rogin in Foreign Policy’s The
Cable says that Republicans intend to filibuster Hagel’s nomination, but
are looking for some way to weasel around the word “filibuster.”

They
don’t like that word (a) because they have tried to normalize the idea that a
60-vote super-majority threshold, which is the margin required to break a
filibuster, should be seen as the routine requirement for Senate action of any
sort; (b) because several prominent Republicans, including John McCain, have
already said that they don’t want to filibuster Hagel; and (c) because in the long history of Cabinet-level
nominations, outright filibusters are exceedingly rare.

What is a filibuster?

A filibuster
in the United States Senate usually refers to obstructive tactics used to
prevent a measure from being brought to a vote. The most common form of
filibuster occurs when a senator attempts to delay or entirely prevent a vote
on a bill by extending debate on the measure. The rules permit a senator,
or a series of senators, to speak for as long as they wish and on any topic
they choose, unless “three-fifths of the Senators duly chosen and sworn”(60
out of 100 senators) bring debate to a close by invoking cloture under Senate Rule XXII.

Most
people think that when someone is filibustering, they are talking endlessly in
order to prevent the Senate from conducting some piece of business, usually a
vote. This is possible unless a consent agreement limits a Senator’s right to
talk as long as he/she wants.

A
“consent agreement,” means a unanimous consent agreement. That
is, all 100 senators have agreed to limit the time for debate. In the absence
of a unanimous consent agreement, senators may talk until they drop.

But that
is not how the filibuster works.

Taking the
possible confirmation of Chuck Hagel as an example, Majority Leader Harry Reid tried
to negotiate a unanimous consent agreement with Minority Leader Mitch McConnell
to bring Hagel’s confirmation up for a debate. The lack of unanimous consent is
the filibuster. One single senator refusing to grant his/her
consent is the filibuster.

In this
case, that unanimous agreement did not happen, so Harry Reid did something
called “filing for cloture.”

Cloture is
how the Senate overcomes the lack of unanimous consent. It currently requires
60 votes. If Harry Reid can get 60 votes for cloture then he has simultaneously
overcome the filibuster.

This will
be the fun part over the next few days.

Now, if 60
votes are quickly acquired, then we don’t talk about it as a filibuster because
the delay was short. We only really speak about filibusters when they are
successful.

By example,
there were a few Democratic senators who in 2006 didn’t grant unanimous consent
to begin debate on the confirmation of Dirk Kempthorne as Interior Secretary.
This only caused a delay of a couple of days; so many people don’t report it as
a filibuster. But that is exactly what it was. It was a failed filibuster.

And the
mini-filibuster of Kempthorne is the only known example of a lack of unanimous
consent to debate a cabinet nominee.

And in Conclusion:

There is no reason to have a dog in the fight over Chuck Hagel’s nomination, other than to beat on the Republicans for acting in a despicable manner. 

Mr. Hagel is a plausible
nominee who has been endorsed by several former Republican appointees,
including Robert Gates, Colin Powell, Brent Scowcroft, and George Schultz. His Republican
opposition started with personal smears and they have moved on to try and use
his nomination to continue the litigation of Benghazi.

Hagel is a Vietnam
veteran who served with some distinction, but he was unimpressive during his
confirmation hearing. It is hard to think of something he would do at the
Pentagon that some other technocrat couldn’t do.

And
Mr. Obama gets almost as much out of Hagel being blocked as he does if he wins
confirmation:

If he is confirmed, Mr.
Obama will have poked the neo-conservatives in the eye and they’ll have to live
with a Secretary of Defense who doesn’t believe in their ideas and would be
happy to screw them.

If he is not
confirmed, it will be because the Republicans filibuster him.

And that will give Democrats a chance
to laugh at Harry Reid, since he had the chance to reform the filibuster rules in
January, but he opted instead to make only a minor change in the Senate’s filibuster
rules. Under the new
rules, the amount of time to debate following a cloture vote has been reduced
from 30 hours to four. Under the new rules, if senators wish to block a nominee
after a motion to proceed, they will need to be present in the Senate and debate.

But failing to
confirm Mr. Hagel will also be food for thought for reasonable Republicans, that the GOP cannot be entrusted with
power.

It’s kind of a
no-lose situation: You’d have to work
hard to see more upside with his confirmation than with the Senate’s failure to
confirm him.

Why? Consider this: In the
span of less than a week, the Republicans will have invited Ted Nugent, a
gun-toting pedophile who admittedly soiled himself in order to avoid the
Vietnam draft to the State of The Union address. And now they will filibuster Chuck
Hagel, a former senator and decorated Vietnam veteran, in order to block his cabinet nomination.