Debt and Deficits: Only the Tip of the Angry Iceberg

Barely had I published my last entry, when the Washington Post came out with a story about how many Democrats are adding fiscal austerity pledges to their campaign platform. I'm unimpressed.

On one hand, it's good that politicians of both parties have finally come to understand that Americans are fed up with deficits and debt. On the other, Democrats in general and many Republicans are missing the bigger picture: the American people want a reevaluation of the proper role of government and how that role should be distributed among the levels of government.

It's not just about the money; it's about being accountability. And if private enterprise cannot successfully undertake some collective action and government can do better, it should be the most local government that can address it, which also happens to be the level most accountable to the people. Suggesting that a congressman from Ohio can be held accountable for education quality in Florida, or a senator from New York for road congestion in California, is simply preposterous.

It's also about being left alone. The decennial census is supposed to count inhabitants for the purpose of apportioning members of the House of Representatives, nothing more. Yet it has morphed into a vast treasure trove for social science researchers. It sounds benign, but besides the privacy issues, the conclusions of that research provide justification for any number of wasteful and often counterproductive interventions.

Americans want more than cheap talk about the federal budget. They want their national political representatives to fundamentally reconsider the role of the federal government, eliminating, privatizing, or transferring to the states those activities that are not within its proper scope.

Constitutional Reform Needed Soon

It's been almost four months since I last blogged, courtesy of a rather heavy reading list for the final lap of grad school.

Twenty books and many discussions later, my grasp of constitutional economics has never been better. In a nutshell, constitutional economics has to do with how the basic rules of governance lead to different political and economic outcomes. The basic challenge is to escape anarchy or despotism by establishing the protective (military, police, courts) and productive (basic infrastructure, environmental protection, monetary policy) functions while constraining the ability of political actors to use the power of the state to redistribute. As it turns out, no advanced country seems to have figured out how to constrain redistribution very well.

In thinking about these issues, I've come to a few tentative conclusions. Politics as usual hasn't been very successful at limiting government. It looks like we need to think about constitutional reforms, such as
- Term limits (5 terms House, 2 terms Senate)
- Spending limits (inflation + population growth)
- Balanced budget requirements (spending = revenue two years before)
- Prohibition on new debt issue
- Two-year budgeting (budget odd years, oversight even years)
- Zero-base budgeting (all programs reconsidered each time)
- Periodic automatic program sunsets (without congressional reapproval, they go away)
- Putting all implicit debts (unfunded Social Security, Medicare, Medicaid, and pension liabilities) on the official annual budget

All of these are aimed at limiting the discretion of politicians. They're our employees, after all, so why do we let them get away with acting like our masters? Government doesn't give us meaning, it's just an instrument to accomplish those necessary things that cannot by provided by voluntary action.

Forcing government to live within its means would stop the intergenerational theft that has run rampant for the last eighty years and force politicians to make choices about priorities. It would also make it easier to say 'no' to the special interests.

How these reforms could be implemented is unclear. But unless Greece's situation looks like fun, we better figure it out soon.

Checks and Balances Are Back

With the just-declared victory of Republican Scott Brown in Massachusetts, checks and balances have finally been restored after a year of Democratic dominance in Washington. And that means the pace of their big spending, big government agenda will slow down dramatically.

Not that unified Republican control several years ago was a picnic. Those years brought us massive federal encroachment into K-12 education, a major expansion of an already unsustainable entitlement program, corruption, continued government meddling in all variety of personal matters, a bloody and expensive war of choice, a spending explosion, and the abandonment of the limited government (aka freedom) agenda that was supposed to be the heart and soul of the conservative movement.

But Democratic control has--in only one year--brought an escalation of the war in Afghanistan, the continuation of Bush-era violations of civil liberties and opaque budget processes, even greater recklessness with our fiscal future, the attempted nationalization of our health care system, increasing the burden of taxes and regulations, and pushing a pork-laden energy bill that even greens have rejected.

This country is better served when checks and balances exist, as when Clinton was balanced by a Republican House from 1995 to 2001. Sure, the internal tensions within the Democrat caucus provided some impediments, but at the end of the day, leadership has an awful lot of clout and can force (and has forced) much down the throats of the rank and file.

This should serve as a wake up call. As Gerald Seib pointed out on WSJ today, Americans' political preferences have stayed remarkably constant over the years. A successful governing agenda is not one that tacks hard to the left or right, but one that is essentially a free market, socially tolerant agenda of "live and let live."

The Democrats still hold the White House, 256 of 435 House seats, and 59 seats in the Senate. But at least the filibuster is back.

If this is a harbinger of things to come, November will be very, very interesting. Stay tuned.

Markets v. Government: What Works?

In the wake of the financial crisis, I keep hearing claims about the discrediting of free markets. To begin with, there's a compelling narrative that the financial crisis was caused by government intervention rather than free market excess.

As to whether government intervention can get us out of this mess, it may well be that individuals and businesses--especially in the financial sector--need to reduce the amount of debt they carry. This podcast argues that this process of deleveraging (reducing debt) is necessary and may take years, but that government policy is trying to prevent this. But delaying spring cleaning keeps the house dirty.

The turmoil in heavily regulated financial markets sheds light on some important questions: which parts of the economy are we happiest with and which make us miserable, and does any link exist between government involvement and our level of satisfaction?

As a middle-class consumer, what works well for me?
- The internet.
- Retailing.
- Reading material like books and magazines.
- Restaurants

What drives me crazy?
- The post office (a government monopoly on first class mail).
- Flying (government owns the airports and air traffic control system, runs the security).
- Health care (government uses tax dollars to pay for half, tilts playing field against individual coverage, regulates health provision and insurance, and on and on).
- Commuting to work (government ownership precludes road expansion or other ways to reduce congestion, such as variable rate tolls).

Now, is there a pattern, or am I just cherry picking?

Well, whenever I've come across something that doesn't work the way it should, I've almost always found that politicians have messed up the incentives for producers to respond appropriately to their customers.

Does greater intervention yield greater dissatisfaction? I have no doubt.

Congress Misdiagnoses Housing Sickness

Last week, Congress passed and the President signed a bill to deal with the so-called housing crisis. My wife and I--first-time homebuyers--are (hopefully) in the final stages of purchasing a foreclosed townhouse. One would think I'd be happy about the housing bill, since it contains a $7,500 first-time-homebuyers tax credit, and that incentive hasn't been capitalized into the value of homes yet. It has to be repaid over 15 years, so it works out to a 15-year 0% loan (actually negative when you factor in inflation). But I'm far from

Anyway, this bill is a disaster. Instead of fixing the problems that caused the housing bubble in the first place, Congress has made things worse. One policy change ends Freddie Mac and Fannie Mae's free riding on the American taxpayer; to continue their special line of credit with the U.S. Treasury, they now face greater regulation and scrutiny. Unfortunately, it would have been far better to remove their special preferences, shrink them down, and spin them off as fully privatized companies. Alas, such a remedy will have to wait. Incidentally, The Cato Institute has warned about this for years (just do a quick search on their website).

Yet even as these companies get bailed out at taxpayer expense, the legislation also taxes them to create an "Affordable Housing Trust Fund," which is essentially a slush fund for big-government special interests. It also provides funds to the states for buying, fixing, and reselling distressed properties. It's a band-aid solution to the symptoms of two major underlying problems: unfocused monetary policy and land use restrictions. Both are more than sufficient for their own post, so I'll abstain from carrying on now.

Congress should have eliminated special preferences for Freddie and Fannie, focused the Federal Reserve's mandate to only target inflation (and not concern itself with variations in employment or output), and ended transfers to the states to fund planning offices that usually do more harm than good.