The disagreement is over the solutions — on what spending to cut; what taxes to raise (basically none ever, according to Boozman); whether or not to enact a balanced budget amendment (Boozman says yes; Pryor no); and on what policies would promote the kind of economic growth that would make this a little easier.
Contrary to rhetoric, borrowing is not evil. There have been times in which government borrowing has been in the national interest. Winning World War II, for instance, probably would have been impossible if the government had not been able to tap private credit markets. Similarly, the limited extent to which President Ronald Reagan’s restoration of the U.S. military added to the national debt was a small price to pay for the collapse of communism.
There are analogies from the private sector as well. Almost all households and businesses go into debt at some point. Consumers borrow to buy cars, families borrow to build homes and send their children to college, and businesses borrow to expand productive capacity. There is nothing wrong, either morally or financially, with these decisions.
Although deficits and debt are not necessarily bad, politicians certainly have abused the privilege. Like profligate consumers who use credit cards to live beyond their means, many politicians see government borrowing as a way to increase federal spending for programs that are not in the nation’s best interests. The difference between the irresponsible consumer and the irresponsible politician is that bad behavior on the part of the consumer leads to a bad credit rating and a sharply reduced ability to borrow money. Politicians escape a similar fate because they can pass the costs of a bill on to the next generation. By requiring a supermajority vote to issue new debt, however, the balanced budget amendment will impose a similar restriction on such fiscally reckless politicians.
Do Deficits Really Stimulate the Economy?
Opponents of a balanced budget requirement, particularly those in the Clinton Administration, argue that deficit spending is a useful tool to jump-start a sluggish economy. By limiting deficits, Treasury Secretary Robert Rubin and others claim, the balanced budget amendment somehow will make economic downturns more likely. This argument is based on the economic theory known as Keynesianism. According to this theory, which first influenced policymakers in the 1930s and remained popular into the 1970s, politicians can stimulate economic growth by borrowing money and increasing government spending.9 Critics from the beginning noted that this theory did not make sense, but politicians liked Keynesian economics because it gave them a quasi-respectable rationale for increased spending.
Ultimately, reality proved to be the undoing of Keynesian economic theory. The economic stagnation of the 1970s showed that deficit spending — especially when combined with rising taxes and inflation — was not a recipe for growth. Moreover, the success of President Reagan’s supply-side tax cuts further undermined the case for Keynesian policies by showing that improved incentives were the key to growth. Nonetheless, there are some who still cling to Keynesian theory.
Despite the accumulated evidence, both from the United States and from around the world, the Administration may believe that deficit spending truly is good for the economy. Even though all versions of the balanced budget amendment contain provisions that allow for supermajority approval of deficits and debt, the White House has launched an extensive lobbying campaign against the amendment.
ENDNOTE
Keynesian theory also favors using monetary policy to fine-tune the economy; but just as the Keynesian view on deficits has fallen into disfavor, so has this notion of manipulating monetary policy.
The disagreement is over the solutions — on what spending to cut; what taxes to raise (basically none ever, according to Boozman); whether or not to enact a balanced budget amendment (Boozman says yes; Pryor no); and on what policies would promote the kind of economic growth that would make this a little easier.
How Soon Would a Balanced Budget Amendment Take Effect?
Before a balanced budget amendment can take effect, it must clear two major hurdles. First and foremost, it must obtain two-thirds support from both houses of Congress. Should this occur, the amendment would be sent to the states for ratification. To become part of the Constitution, it would need to be approved by both chambers of three-fourths, or 38, of the state legislatures.4 If an amendment is approved by Congress and ratified by the necessary number of state legislatures, there probably would be a grace period of two years between ratification and actual implementation. Many supporters would like to time the amendment to take effect in 2002 because that is the target date for balancing the budget, but the actual timing will depend on overcoming the obstacles that exist.
Would the Amendment Solve America’s Economic Problems?
A balanced budget amendment does not guarantee sound economic policy. All it does is make it difficult for politicians to finance their spending by borrowing money. Supporters of the amendment believe that restricting debt will result in smaller government, and scholarly evidence demonstrates that the economy will grow faster if the size of government is reduced.5 It is also possible, however, that a simple balanced budget requirement could lead politicians to finance their spending through higher taxes. Such financing policies almost certainly would dampen the economy’s performance. Moreover, because of lower incomes, lost jobs, and reduced profits, tax increases have never generated the amount of new revenues that politicians expected;6 thus, a balanced budget amendment could trigger a dismal cycle of more taxes, followed by more debt, followed by more taxes, followed by more debt, and so on.
For this reason, requiring a supermajority in order to raise taxes to balance the budget is critical. More specifically, a supermajority means there would be no bias in favor of tax-financed spending, and the likelihood of a continuing spiral of taxes and debt would be greatly diminished.
To be fair, the constitutional majority requirement in the amendment proposed by Senator Craig and Representatives Stenholm and Schaefer could require a supermajority of those voting if some members are absent. For example, 51 votes would be required in the Senate even if only 90 Senators were available to cast their votes. In this case, for instance, a tax increase would need the approval of 57 percent of Senators present. This also would be true in the House, where passage would require 218 votes. The problem with a “constitutional” majority to pass tax increases, however, should be clear: If all Members of Congress were available for a vote, a tax hike could pass with a simple majority.
Would a Balanced Budget Lead to Lower Interest Rates?
Some proponents of a balanced budget amendment argue that eliminating the deficit would lead to dramatic reductions in interest rates. The scholarly research,7 however, indicates that these claims are, at best, greatly exaggerated. Although it is almost certainly true that reductions in government borrowing will put downward pressure on interest rates, it appears that the impact is too small to measure. Simply stated, in world capital markets in which trillions of dollars exchange hands every day, changes of $30 billion, $40 billion, or $50 billion in the U.S. budget deficit are not large enough to make a measurable difference.
This can be seen by comparing interest rates and budget deficits over the past 20 years. During this period, budget deficits have experienced significant shifts up and down with changing fiscal and economic circumstances. As Chart 4 illustrates, however, interest rates do not respond as the theory predicts. Indeed, instead of rising when deficits increase and falling when deficits decline, the opposite seems to be the case. This does not mean that higher budget deficits lead to lower interest rates; it means simply that other factors, such as monetary policy, tax policy, and overall demand for credit, are much more important than shifts in the U.S. budget deficit.8
End Notes:
Nebraska has a unicameral legislature.
See Kevin Grier and Gordon Tullock, “An Empirical Analysis of Cross-National Economic Growth, 1951-80,” Journal of Monetary Economics, Vol. 24 (1989), pp. 259-276; see also Robert Barro and Xavier Sala-I-Martin, Economic Growth (New York, N.Y.: McGraw-Hill, Inc., 1995), p. 494.
For more detail on flaws in the current revenue-estimating process, see Daniel J. Mitchell, “How to Measure the Revenue Impact of Changes in Tax Rates,” Heritage Foundation Backgrounder No. 1090, August 9, 1996.
Charles I. Plosser, Further Evidence on the Relation Between Fiscal Policy and the Term Structure (Rochester, N.Y.: University of Rochester, 1986).
For more detail on the lack of a relationship between interest rates and the deficit, see Daniel J. Mitchell, “Taxes, Deficits, and Economic Growth,” Heritage Foundation Lecture No. 565, May 14, 1996.
Harry Smith spoke with Rep. Michele Bachmann (R-MN), Rep. Debbie Wasserman Schultz (D-FL), Rep. Anthony Weiner (D-NY), and Rep. elect Mike Kelly (R-PA) on how, with a shift in power, will congress set aside disagreements and work together to solve such issues as deficit reduction, job creation, and turning the economy around.
WASHINGTON – House Republicans dealt defeat to their own proposal for a $2.4 trillion increase in the nation’s debt limit Tuesday, a political gambit designed to reinforce a demand for spending cuts to accompany any increase in government borrowing.
The vote was lopsided, with just 97 in favor of the measure and 318 against.
House Democrats accused the GOP of political demagoguery, while the Obama administration maneuvered to avoid taking sides — or giving offense to majority Republicans.
The debate was brief, occasionally impassioned and set a standard of sorts for public theater, particularly at a time when private negotiations continue among the administration and key lawmakers on the deficit cuts Republicans have demanded.
The bill “will and must fail,” said Rep. Dave Camp, R-Mich., the House Ways and Means Committee chairman who noted he had helped write the very measure he was criticizing.
“I consider defeating an unconditional increase to be a success, because it sends a clear and critical message that the Congress has finally recognized we must immediately begin to rein in America’s affection for deficit spending,” he said.
But Rep. Sander Levin, D-Mich., accused Republicans of a “ploy so egregious that (they) have had to spend the last week pleading with Wall Street not to take it seriously and risk our economic recovery.”
He and other Democrats added that Republicans were attempting to draw attention away from their controversial plan to turn Medicare into a program in which seniors purchase private insurance coverage.
The proceedings occurred roughly two months before the date Treasury Secretary Tim Geithner has said the debt limit must be raised. If no action is taken by Aug. 2, he has warned, the government could default on its obligations and risk turmoil that might plunge the nation into another recession or even an economic depression.
Republicans, who are scheduled to meet with Obama at the White House on Wednesday, signaled in advance that the debt limit vote did not portend a final refusal to grant an increase.
The roll call vote was held late in the day, and there was little, if any discernible impact on Wall Street, where major exchanges showed gains for the day. At the same time, it satisfied what GOP officials said was a desire among the rank and file to vote against unpopular legislation the leadership has said eventually must pass in some form.
Republicans said they were offering legislation Obama and more than 100 Democratic lawmakers had sought.
But Rep. Steny Hoyer of Maryland, the second-ranking Democrat, accused the GOP of staging a “demagogic vote” at a time lawmakers should work together to avoid a financial default.
All 97 votes in favor of the measure were cast by Democrats, totaling less than a majority and far under the two-thirds support needed for passage.
For its part, the administration appeared eager to avoid criticizing Republicans.
“It’s fine, it’s fine,” presidential press secretary Jay Carney said when asked about the Republican decision to tie spending cuts with more borrowing.
“We believe they should not be linked because there is no alternative that’s acceptable to raising the debt ceiling. But we’re committed to reducing the deficit,” Carney said.
The government has already reached the limit of its borrowing authority, $14.3 trillion, and the Treasury is using a series of extraordinary maneuvers to meet financial obligations.
By no longer would making investments in two big pension funds for federal workers and beginning to withdraw current investments, for example, the Treasury created $214 billion in additional borrowing headroom.
At the same time, the Obama administration and congressional leaders are at work trying to produce a deficit-reduction agreement in excess of $1 trillion to meet Republican demands for spending cuts.
Political maneuvering on legislation to raise the debt limit has become common in recent years, as federal deficits have soared and presidents of both political parties have been forced to seek authority to borrow additional trillions of dollars.
Because such legislation is unpopular with voters, presidents generally look to lawmakers from their own political party to provide the votes needed for passage. In the current case, though, Republicans control the House, and without at least some support from them, Obama’s request for a debt-limit increase would fail.
However, House Speaker John Boehner, R-Ohio, announced months ago that he would demand spending cuts as a condition for passage.
“It’s true that allowing America to default would be irresponsible,” he said on May 9 in a speech to the Economic Club of New York. “But it would be more irresponsible to raise the debt limit without simultaneously taking dramatic steps to reduce spending and to reform the budget process.”
Below info from ReasonTV:
Some say the world will end in fire and some say in ice.
But in Washington, a lot of people say it will end if we don’t continually raise the debt ceiling.
The statutory debt limit, or debt ceiling, represents the maximum amount of debt the federal government can carry at any given time. The limit was created in 1917 so that Congress wouldn’t have to vote every time the government wanted to increase the amount of debt (which was becoming a more and more frequent occasion). Since then, the Treasury Department has had the authority to issue new debt up to whatever the limit is to fund government needs. Last year, the limit was raised to $14.3 trillion, an amount that is about to reached.
As it approaches, Federal Reserve Chairman Ben Bernanke has said failing to raise the limit would likely mean the U.S. would default on its debt, creating “real chaos” in place of the fake chaos that’s out there now. Treasury Secretary Timothy Geithner has said that failing to raise the limit would be “deeply irresponsible” and and Austan Goolsbee, President Obama’s chief economic adviser, has said that not raising the limit would create “the first default in history caused purely by insanity.”
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The first thing I intend to do is join the tea party. Then I’m going to refuse to raise my debt limit. Then I’m going to call the Visa people.
“Y’all have me down here owing $6,000,” I’m going to say. “But I’ve become a fiscal conservative. I’m getting really disciplined fiscally. I’m taking my household back.
“My self-imposed debt ceiling is $4,000. I’ve opted not to raise it. Nary a cent. I only went over it because the oral surgeon demanded immediate payment.
“So $4,000 is the most you rascals will get out of me. You may as well quit compounding the interest on this outstanding balance. I am serious about this. You may consider this baby capped at four grand.
“Oh, by the way: Don’t even think about canceling this card. I have a second round of dental work coming up and the oral surgeon doesn’t give these implants away.
“Thank you, and remember: Vote Palin-Bachmann.”
You are thinking this is absurd. You are right, of course.
But you are not intellectually entitled to call it absurd if you are among the seven in 10 Americans telling pollsters you don’t want the federal government’s debt ceiling raised. You are not intellectually entitled if you are one of these right-wing politicians pandering to this tea-drunken grandstand by threatening to vote not to raise it.
Here is how real fiscal responsibility works: You repay the debt that you have incurred to date. You make spending reductions prospectively by showing sufficient discipline to reduce the future pace at which you incur debt. You dare not let your existing debt go unpaid lest your credit score suffer and you get denied the next time you find yourself in a bit of a pinch and need to finance a refrigerator at Sears.
Michael D. Tanner is a senior fellow at the Cato Institute and author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution. Here is a portion of this recent article:
Now that Osama bin Laden has been successfully dispatched to the eternal damnation he so richly deserves, Washington is ready to return to the more mundane question of whether the Obama administration will be allowed to spend this country into oblivion.
The next big fiscal fight will be over when and how to increase the debt limit. The administration has been hard at work trying to shape the message and public opinion. Unsurprisingly, much of that message is less than 100 percent accurate. Here are some myths about the debt ceiling and the upcoming debate about raising it:
4. This is not about future spending. The administration insists that raising the debt ceiling is just about paying for spending that’s already occurred. Not quite. Depending on how high it is raised, it may be about paying only for spending that is already authorized — or much more. Authorized and spent are not the same thing. There is nothing wrong with forcing government not to spend money that it had planned on spending. Moreover, Tim Geithner is reportedly calling for an increase in the debt ceiling big enough to last through the 2012 election, which would enable a lot of new spending.
”These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
Take a look at this video clip below.
Mark Calabria from the Cato Institute on Financial Regulation
Mark Calabria from the Cato Institute joins Crane to discuss financial regulation
Corporate whistleblowers are getting bigger and bigger payouts for reporting fraud, sparking a fresh debate about whether the rewards are justified.
Whistleblowers have collected billions of dollars since the late 1980s by suing government contractors under the False Claims Act and other federal laws. The new Dodd-Frank financial reform law could lead to more payments, something plaintiff attorneys say will provide checks on businesses but companies fear will circumvent their own internal anti-fraud systems.
Awards for reporting fraud hit a record high of $385 million in the 12 months ended Sept 30, 2010, Justice Department data showed. The total rose nearly 50 percent from the previous year and was the third increase in a row.
The Dodd-Frank law calls on the Securities and Exchange Commission to pay awards to people who report violations leading to at least $1 million in sanctions.
Workers should have to report problems to internal company monitors as well as to the SEC, some business groups say. Some want the agency to limit payouts if the worker did not try to solve matters internally first.
As proposed SEC Dodd-Frank rules are written, workers would have an incentive to circumvent their companies’ compliance systems in hopes of getting a big cash payout, chemical maker Huntsman Corp wrote in a comment letter to the SEC.
Employees “have been deputized and promised huge riches to bypass their companies and report to the government” under the new law, said David Baris, head of the American Association of Bank Directors.
But Steven Kohn, executive director of the National Whistleblowers Center in Washington, said internal company programs often fail to fully investigate wrongdoing. He said employees should have a choice where to raise concerns.
Big payouts are the price of getting good information from people who risk their careers to report problems, he said.
“If you want to get the big fish, you have got to pay the big award,” Kohn said.
Kohn has made a career representing people bringing False Claims Act cases. The Civil War-era law was changed in 1986 to give individuals up to 30 percent of recoveries from government contractors. Since then, fraud settlements and court judgments rose to $3 billion in 2010, up from $176 million in 1988.
GROWING RECOVERIES
False Claims cases are “qui tam” lawsuits, a Latin phrase meaning a plaintiff is suing “for the King as well as for himself.” A record 573 new qui tam cases were filed in fiscal 2010, up from 433 the year before.
In October, a former GlaxoSmithKline employee was awarded $96 million, the largest payment ever in such a case. Her reward was part of the $750 million the drugmaker paid to settle a manufacturing fraud case.
False claims cases in state courts also are up. Lawsuits against Bank of New York Mellon contend it overcharged pension funds in Florida and Virginia for foreign exchange services. The cases resemble one pending against State Street Corp in California. Both banks deny wrongdoing.
Various groups have called in the past for caps on these awards, but those arguments have found little traction. For instance, a 2009 proposal by Arizona Republican Sen. Jon Kyl to cap whistleblower awards at $50 million was defeated. Another Republican, Iowa Sen. Charles Grassley, has been a chief defender of the rewards as a way to root out waste.
Critics have gotten an ally, however, in Skadden Arps attorney Michael Loucks, who until 2009 was a top Justice official prosecuting fraud cases. He won settlements from companies including Serono Labs, now part of Merck KGaA, based on whistleblower claims.
In a recent paper in trade journal Health Care Fraud Report, Loucks argued that Congress should cap payments under the False Claims Act to $2 million. That would vastly increase recoveries to taxpayers, he argues.
Of the 14 largest settlements since 2008, whistleblowers received $650 million — $622 million more than if the cap were in place, he wrote.
(Reporting by Ross Kerber, editing by Matthew Lewis)
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It is interesting to me that people like Barney Frank who is responsible for this mess in the first place, are in charge of cleaning up this. Frank pushed for loans to be made to people who did not have enough money to secure those loans and that is why we have this problem to begin with. Take a look at this article below.
The House and Senate will soon vote on a finalized financial-regulation bill, one that was mostly hammered out in a closed-door conference between the two chambers. Legislators will have a stark, simple choice: support a bill that gives us more of the same flawed banking regulations, or reject it in the hopes that new congressional leadership next year will address the actual causes of the financial crisis.
Perhaps it should come as no surprise that Sen. Christopher Dodd and Rep. Barney Frank, the bill’s primary authors, would fail to end the numerous government distortions of our financial and mortgage markets that led to the crisis. Both have been either architects or supporters of those distortions. One might as well ask the fox to build the henhouse.
Nowhere in the final bill will you see even a pretense of rolling back the endless federal incentives and mandates to extend credit, particularly mortgages, to those who cannot afford to pay their loans back. After all, the popular narrative insists that Wall Street fat cats must be to blame for the credit crisis. Despite the recognition that mortgages were offered to unqualified individuals and families, banks will still be required under the Dodd-Frank bill to meet government-imposed lending quotas.
Mark A. Calabria is director of financial-regulation studies at the Cato Institute.
While apologists for government-mandated lending are correct in pointing out that much of the worst lending was originated by state-chartered lenders, such as Countrywide, and not federally chartered banks, they either miss or purposely ignore the truth that these non-bank lenders were selling the bulk of their loans to Fannie Mae, Freddie Mac, or the government corporation Ginnie Mae. About 90 percent of loans originated by Countrywide, the largest subprime lender, were either sold to Fannie Mae or backed by Ginnie Mae. Subprime lenders were so intertwined with Fannie and Freddie that Countrywide alone constituted over 25 percent of Fannie’s purchases.
While one can debate the motivations behind Fannie and Freddie’s support for the subprime market, one thing should be clear: Had Fannie and Freddie not been there to buy these loans, most of them would never have been made. And had the taxpayer not been standing behind Fannie and Freddie, they would have been unable to fund such large purchases of subprime mortgages. Yet rather than fix the endless bailout that Fannie and Freddie have become, Congress believes it is more important to expand federal regulation and litigation to lenders that had nothing to do with the crisis.
The legislation’s worst oversight is to ignore completely the role of loose monetary policy in driving the housing bubble. A bubble of such historic magnitude as the one we went through can only occur in an environment of extremely cheap and plentiful credit. The ultimate provider and price-setter of that credit was the Federal Reserve. Could anyone truly have believed that more than three years of a negative real federal-funds rate — where one is essentially being paid to borrow — would not end in tears?
As the Federal Reserve’s monetary policy is largely aimed at short-term borrowing, the Fed also drove the spread between short- and long-term borrowing to historic heights. This created irresistible incentives for households and companies to borrow short — sometimes as short as overnight — and lend long. Many households chose adjustable-rate mortgages that would later reset as interest rates rose, increasing monthly payments. For banks, this spread provided an opportunity for handsome profits by simply speculating on the yield curve.
Avoiding the issue of loose monetary policy may well be the result of Congress’s possessing almost no understanding of it. The first obvious step toward building such an understanding would be to have the GAO audit the Fed’s monetary policy. Yet Congress continues to ban the GAO from examining the issue. It is as if Congress does not even want to understand the causes of the crisis.
Nor has there been any discussion in Congress about removing the tax preferences for debt. Washington subsidizes debt, taxes equity, and then acts surprised when everyone becomes extremely leveraged.
Until Washington takes a long, deep look at its own role in causing the financial crisis, we will have little hope for avoiding another one. And the Dodd-Frank legislation, sure to be heralded as strong medicine for perfidious financiers, is actually not even a modest step in the right direction.
The disagreement is over the solutions — on what spending to cut; what taxes to raise (basically none ever, according to Boozman); whether or not to enact a balanced budget amendment (Boozman says yes; Pryor no); and on what policies would promote the kind of economic growth that would make this a little easier.
Senior citizens worry that a balanced budget requirement would pressure Congress to reduce Social Security benefits. This is a legitimate concern, but the amendment is not the problem. Social Security has an unfunded liability of between $7 trillion and $11 trillion. Whether the amendment is approved or not, lawmakers will be forced to address this issue, especially once the system begins to run a deficit shortly after the turn of the century.
The privatization of Social Security is the best way for senior citizens to protect their retirement benefits. When Chile privatized its retirement system, participants were given bonds equal to the value of their promised benefits. These bonds became the participants’ private property, which meant that benefits no longer were subject to the whims of politicians. This privatization should occur in the U.S. system as well, regardless of whether the Constitution is changed to require a balanced budget. It is the only way senior citizens and those nearing retirement can ensure their retirement income.
Some opponents of the balanced budget amendment have argued that Social Security funds should be excluded because the surplus “masks the true size of the deficit.” But Social Security is a government program; the money spent on retirement benefits is government spending, and payroll taxes are government revenues. The only proper and reasonable definition of the deficit is the amount of money the government has to borrow from private credit markets when total spending exceeds total revenue.
To exclude Social Security from the balanced budget requirement would be to create a gaping loophole that lawmakers could use to promote new spending at the expense of the economy and future generations. It does not take a vivid imagination, for instance, to foresee future lawmakers creating new programs and making them part of the Social Security system in order to avoid having to pay for them.2 Critics of the amendment will deny this is their goal, and will argue that their real intent is simply to protect Social Security from future cuts. If that were the case, however, they would support privatization.
Rather than use Social Security as a way to add loopholes, policymakers should see the balanced budget amendment as absolutely essential to dealing with the looming Social Security crisis. In less than 15 years, Social Security will begin to run deficits — shortfalls that will grow rapidly to alarming levels. Defenders of the status quo say there is nothing to worry about until the Trust Fund runs out around 2030, but this ignores the fact that the Trust Fund is nothing more than the “IOUs” that the government has issued to itself.
As a result of this recurrent practice, the moment Social Security goes in the red shortly after the turn of the century, lawmakers will come under enormous pressure to deal with the system’s unfunded liabilities. Needless to say, this may require significant benefit reductions or crippling payroll taxes.3 To the extent that the government still is running large deficits when the Social Security crisis hits, the steps that must be implemented will have become even more severe.
Endnotes:
The “gross” federal debt is about $5.3 trillion, but this includes $1.5 trillion the Department of the Treasury owes to other parts of the federal government (such as the Social Security Trust Fund). Thus, this $5.3 trillion figure, like the Trust Funds themselves, is meaningless. The only debt that has any real economic meaning is the amount “held by the public” (in other words, the amount the government has borrowed from private credit markets).
For those who doubt this could happen because politicians would be reluctant to add programs to Social Security that are not related to old-age retirement, the food stamps program is instructive. Even though welfare programs usually are administered by the Department of Health and Human Services, the food stamp program was given to the Department of Agriculture. Supporters put forward the weak rationale that the food people eat usually comes from farms, which is rather like arguing that housing programs should fall under the Department of the Interior because so much lumber comes from national forests. The real reason, however, was to create an alliance for more spending: Supporters of agriculture subsidies wanted votes from Members of Congress representing urban areas, and supporters of more welfare wanted votes from Members of Congress representing rural areas. Lumping these two programs together created precisely that dynamic.
The ideal way to avoid the Social Security crisis would be through privatization, as Chile, Australia, and Great Britain already have done. For more detail, see Daniel J. Mitchell’s forthcoming Heritage Foundation paper on Social Security.
Mark Levin interviews Senator Hatch 1/27/2011 about the balanced budget amendment. Mark is very excited about the balanced budget amendment being proposed by Senator Orin Hatch and John Cornyn and he discusses the amendment with Senator Hatch. Senator Hatch explains the bill it’s ramifications and limitations. Senator Hatch actually worked on this bill with renowned economist Milton Friedman. This ammendment is the first big step in saving our country.
The disagreement is over the solutions — on what spending to cut; what taxes to raise (basically none ever, according to Boozman); whether or not to enact a balanced budget amendment (Boozman says yes; Pryor no); and on what policies would promote the kind of economic growth that would make this a little easier.
How The amendment is written will depend on the purpose desired. Two competing versions of the balanced budget amendment are before Congress at the present time, one with a supermajority tax limitation provision and one without. Both amendments include a requirement that lawmakers balance the budget unless a deficit has been approved by a supermajority vote of Congress. A third proposal also has been offered, but it is not a true “balanced budget” amendment because it exempts a significant portion of the federal budget before the calculations are made. The three amendments can be described generally as follows:
The Tax Limitation/Balanced Budget Amendment. Sponsored in the House by Representative Joe Barton (R-TX), this amendment contains a prohibition on deficits and debts without a two-thirds vote of Congress. It also includes a special escape clause in case of war. The most important provision of the Barton amendment is its requirement that tax increases also must obtain two-thirds approval.
A Balanced Budget Amendment. Sponsored by Senator Larry Craig (R-ID) and Representatives Charles Stenholm (D-TX) and Dan Schaefer (R-CO), this version is very similar to the Barton tax limitation/balanced budget amendment. It does not include, however, a meaningful provision that prevents efforts to balance the budget by raising taxes. There is a requirement that tax increases be approved by a “constitutional majority” (51 in the Senate and 218 in the House) during a roll call vote, but this is only a small improvement over current law. In addition, only a three-fifths vote would be required to approve deficits or debt. Both this version of the amendment and that of Representative Barton enjoyed significant support in the 104th Congress.
The “Exempt Social Security” Amendment. Led by Senator Byron Dorgan (D-ND), some Members of Congress are proposing an amendment that supposedly would require a balanced budget while allowing politicians to pretend that Social Security did not exist. The most noteworthy feature of this version is its political relevance. Many Members of Congress do not want a balanced budget requirement, but they realize that voting “no” would antagonize voters. Presenting a phony alternative allows these members to vote against a legitimate version of the amendment and, at the same time, tell their constituents that they voted for a balanced budget amendment.
The disagreement is over the solutions — on what spending to cut; what taxes to raise (basically none ever, according to Boozman); whether or not to enact a balanced budget amendment (Boozman says yes; Pryor no); and on what policies would promote the kind of economic growth that would make this a little easier.
After nearly 30 consecutive years of deficit spending, Congress soon will vote on whether to add a balanced budget amendment to the Constitution. Should an amendment be approved by Congress and ratified by the states, the fiscal policy changes could be enormous. The objective of imposing such discipline is to balance the budget by reducing the size of government. A strong provision to limit taxes — such as a two-thirds supermajority requirement to raise taxes — would help ensure that politicians could not evade the amendment’s intent by simply replacing debt-financed spending with tax-financed spending.
For much of America’s history, government debt was kept under control. On those rare occasions on which budget deficits did occur, almost invariably because of war or economic downturn, lawmakers would approve budget surpluses in subsequent years. Unfortunately, beginning in the 1930s and culminating in the 1970s, this strong sense of fiscal responsibility was replaced by the view that deficit spending was good for the economy.
Armed with the rationale that more government would help the economy, politicians therefore were free to indulge in special-interest spending on an unprecedented scale. The fiscal policy consequences, not surprisingly, have been unpleasant. In particular:
The annual budget today is nearly 18 times larger than it was in 1960.
In inflation-adjusted dollars, government spending has tripled.
Government is now spending nearly $6,100 for every man, woman, and child in America, up from $510 in 1960.
Since 1960, the budget has been balanced only once, and deficit spending has increased the national debt from less than $237 billion to nearly $3.9 trillion.1
Each person’s share of that $3.9 trillion debt is more than $14,450, up from $1,311 in 1960.
Interest payments on the debt now consume about $240 billion annually — more than the combined budgets of the Departments of Commerce, Agriculture, Education, Energy, Justice, Interior, Housing and Urban Development, Labor, State, and Transportation.
The real news is even worse: The government’s official debt calculation does not include $10 trillion to $20 trillion in unfunded liabilities for Social Security, Medicare, government employee retirement programs, and other programs.
This rampant use of deficit spending not only endangers the well-being of millions of Americans, but also has mortgaged the future of America’s children. The United States needs a balanced budget now. Even more important, however, is how the budget is balanced. If policymakers want a balanced budget amendment to promote faster economic growth, they need to make sure that their efforts result in less government spending. And the only way to do that is by adding to the amendment a meaningful tax limitation provision.
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If you know anything about me, then you know that in 1980 my political life was forever changed by a man by the name of Milton Friedman. He could take tough questions that I could not answer and provide easy answers backed up with facts. For instance, I was told by my liberal professors at college that the founding fathers envisioned a small simple government that would never work in the complicated world we live in now. How was I to answer? Take a look below at the answer that Milton Friedman had.
Today I have included some comments from Milton Friedman from his Film Series “Free to Choose: Episode 10 How to Stay Free,” which addresses several issues concerning how to control our spending.
Lawrence E. Spivak: Let’s go back to Jefferson. You say cut the functions of central government to the basic functions advocated by Jefferson which was what? Defense against foreign enemies, preserve order at home, and mediate our disputes. Now, can we do that in the complicated, the complex world we live in today, without getting into very serious trouble.
Friedman:Suppose we look at the activities of government in the complex world of today. And ask to what extent has the growth of government arisen because of those complexities? And the answer is, very little indeed. What is the area of government that has grown most rapidly? The taking of money from some people and the giving of it to others. The transfer area. HEW, a budget 1_1/2 times as large as a whole defense budget. That’s the area where government has grown. Now, in that area, the way in which technology has entered has not been by making certain functions of government necessary, but by making it possible for government to do things they couldn’t have done before. Without the modern computers, without modern methods of communication and transportation, it would be utterly impossible to administer the kind of big government we have now. So I would say that the relation between technology and government has been that technology has made possible big government in many areas, but it’s not required it.
Ronald Reagan on Milton Friedman
Ronald Reagan introduces a volume of the documentary series Free To Choose by Milton Friedman. From the 1990 series, volume 3 of 5.
Below are some other posts I did about Milton Friedman’s ideas:
As the federal government hit its debt limit of $14.3 trillion Monday, Pennsylvania Sen. Pat Toomey said the Obama administration must accept substantial spending cuts to win congressional approval to borrow more money.
The Treasury Department began shuffling funds around, including stopping payments into pension accounts, and Secretary Tim Geithner said that such stopgap measures would last until Aug 2. If congressional leaders can’t reach a deal on raising the debt ceiling by then, the United States will default on its debt, Geithner said.
Toomey, a Republican and former investment banker, said such warnings were “scare tactics,” adding that a failure to raise the debt limit would be disruptive, but not catastrophic. The White House has said it wants Congress to bump up the limit without preconditions.
The situation is “like the family that is routinely spending more than their income and making up the difference running up credit cards – and when they reach the limit on their last credit card, the White House position is, ‘Throw another credit card at them,’ ” Toomey said in a luncheon speech to the Philadelphia chapter of the Federalist Society, an organization of conservative lawyers.
“My own view is, it’s time for an intervention,” he said.
A year’s worth of federal tax revenue is more than 10 times the government’s annual payments on its debt, Toomey said, so the nation would be able to avert default by making a priority of spending to pay interest on its debt first. In February, Toomey introduced the Full Faith and Credit Act, a bill that would require such an approach when the debt limit was exceeded.
“Instead of the scare tactics, they ought to be discussing the kind of reforms we can make to get on a sustainable fiscal path,” Toomey said after his speech at the Blank Rome law firm’s offices in Logan Square.
He favors a statutory cap on overall federal spending in the future as a condition for approving a debt-limit increase – an approach that House Speaker John Boehner has suggested as well. Spending cuts, Boehner said in a statement Monday, must be “greater than any increase in the debt limit.”
Nine times in the last decade the federal government has crept near its debt ceiling and Congress has voted to raise it.
Tea party types say they intend this time to tie their votes to raise the debt limit to actual and concurrent spending reductions.
But this is no equation. You absolutely owe your debt. Quite separately, it’s up to your future behavior whether you can fashion spending reductions to gain control of tomorrow’s debt so that you don’t have to keep dealing with these kinds of untenable financial and political situations.
Michael D. Tanner is a senior fellow at the Cato Institute and author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution. Here is a portion of this recent article:
Now that Osama bin Laden has been successfully dispatched to the eternal damnation he so richly deserves, Washington is ready to return to the more mundane question of whether the Obama administration will be allowed to spend this country into oblivion.
The next big fiscal fight will be over when and how to increase the debt limit. The administration has been hard at work trying to shape the message and public opinion. Unsurprisingly, much of that message is less than 100 percent accurate. Here are some myths about the debt ceiling and the upcoming debate about raising it:
2. Failure to pass the debt-ceiling increase on time would be unprecedented. Both the administration and the media sound as if we are at the edge of zero hour, the time at which economic Armageddon will erupt if we have not raised the debt ceiling. That’s not quite so. It is true that Congress has never refused to raise the debt ceiling. But it has, in fact, frequently taken its time doing so. In 1985, Congress waited nearly three months after the debt limit was reached before it authorized a permanent increase. In 1995, four and a half months passed between the time the government hit its statutory limit and the time Congress acted. And in 2002, Congress delayed raising the debt ceiling for three months. In none of those cases did the world end. It won’t this time, either.
3. It’s always a “clean bill.” The administration is also insisting that it would be shocking for Congress to add any conditions to the debt-ceiling increase. But such conditions are far from unprecedented. There have been numerous amendments and conditions attached to debt-ceiling bills throughout the years. Remember Gramm-Rudman-Hollings? The classic spending-control plan was added to the debt-ceiling vote in 1985.
Using Social Security as his prime example, Professor Friedman explodes the myth that the major expansions in government resulted from popular demand. In a speech delivered more than 30 years ago, he directly relates this dynamic to today’s health care debate. http://www.LibertyPen.com
Milton Friedman
Born July 31, 1912
Brooklyn, New York City
Died November 16, 2006
San Francisco, California
Known for
Monetarism
Permanent income hypothesis
Critique of Phillips curve
Notable Prizes
John Bates Clark Medal (1951)
Nobel Memorial Prize in Economics (1976)
Presidential Medal of Freedom (1988)
Milton Friedman (July 31, 1912 – November 16, 2006) was an American economist who made major contributions to the fields of macroeconomics, microeconomics, economic history and statistics while advocating laissez-faire capitalism.
In Capitalism and Freedom (1962) he advocated minimizing the role of government in a free market in order to create political and social freedom. In 1976, he won the Nobel Prize in Economics for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy. His television series Free to Choose aired on PBS in early 1980. It became a book, co-authored with his wife, Rose Friedman. The book was widely read, as were his columns for Newsweek magazine. In statistics, he devised the Friedman test.
His political philosophy stressing the advantages of the marketplace and the disadvantages of government intervention shaped the outlook of American conservatives and had a major impact on the economic policy of the Ronald Reagan administration in the U.S. and on many other countries after 1980.
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I read Milton Friedman’s book “Free to Choose” and practically memorized his 10 part film series (with the same name). I once got to correspond with him, and I was thrilled that he took time to write me back.
Ronald Reagan was another one of my heroes and so was Francis Schaeffer. It was amazing to me that these gentlemen actually had so many connections. Francis Schaeffer’s good friend C. Everett Koop was in the Reagan Administration. Milton Friedman was good friends with Reagan as well.
Milton Friedman wrote an excellent article, “Speaking the truth about Social Security Reform,” April 12, 1999, Cato Institute and I will posting portions of that article in the next few days. Milton Friedman, winner of the 1976 Nobel Prize in Economics, was a senior research fellow at the Hoover Institution. Originally published in the New York Times January 11, 1999. Here is the first portion:
Executive Summary
As support grows for transforming Social Security from a pay-as-you-go defined benefit program to a system of individually owned, privately invested accounts, critics of privatization have warned that making the transition to such a new system would impose substantial new costs on today’s young workers. However, given a proper understanding of Social Security’s current unfunded liabilities—variously estimated at from$4 trillion to $11 trillion—there are no real transition costs to privatizing Social Security, merely the explicit recognition of current implicit debt.
A privatized SocialSecurity system should not be mandatory. The fraction of a person’s income that it is reasonable for him or her to set aside for retirement depends on that person’s circumstances and values. It makes no more sense to specify a minimum fraction for all people than to mandate a minimum fraction of income that must be spent on housing or transportation. Our general presumption is that individuals can best judge for themselves how to use their resources.
The ongoing discussion about privatizing Social Security would benefit from paying more attention to fundamentals, rather than dwelling simply on nuts and bolts of privatization.
The first thing I intend to do is join the tea party. Then I’m going to refuse to raise my debt limit. Then I’m going to call the Visa people.
“Y’all have me down here owing $6,000,” I’m going to say. “But I’ve become a fiscal conservative. I’m getting really disciplined fiscally. I’m taking my household back.
“My self-imposed debt ceiling is $4,000. I’ve opted not to raise it. Nary a cent. I only went over it because the oral surgeon demanded immediate payment.
“So $4,000 is the most you rascals will get out of me. You may as well quit compounding the interest on this outstanding balance. I am serious about this. You may consider this baby capped at four grand.
“Oh, by the way: Don’t even think about canceling this card. I have a second round of dental work coming up and the oral surgeon doesn’t give these implants away.
“Thank you, and remember: Vote Palin-Bachmann.”
You are thinking this is absurd. You are right, of course.
But you are not intellectually entitled to call it absurd if you are among the seven in 10 Americans telling pollsters you don’t want the federal government’s debt ceiling raised. You are not intellectually entitled if you are one of these right-wing politicians pandering to this tea-drunken grandstand by threatening to vote not to raise it.
Here is how real fiscal responsibility works: You repay the debt that you have incurred to date. You make spending reductions prospectively by showing sufficient discipline to reduce the future pace at which you incur debt. You dare not let your existing debt go unpaid lest your credit score suffer and you get denied the next time you find yourself in a bit of a pinch and need to finance a refrigerator at Sears.
Michael D. Tanner is a senior fellow at the Cato Institute and author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution. Here is a portion of this recent article:
Now that Osama bin Laden has been successfully dispatched to the eternal damnation he so richly deserves, Washington is ready to return to the more mundane question of whether the Obama administration will be allowed to spend this country into oblivion.
The next big fiscal fight will be over when and how to increase the debt limit. The administration has been hard at work trying to shape the message and public opinion. Unsurprisingly, much of that message is less than 100 percent accurate. Here are some myths about the debt ceiling and the upcoming debate about raising it:
1. Failure to pass means defaulting on our debts. If there has been consistent message from the White House, it that the United States can’t afford to “default on our debts.” That is almost certainly true. However, refusing to raise the debt limit does not mean defaulting on our debts. The U.S. Treasury currently takes in more than enough revenue to pay both the interest and the principal on the debts we currently owe. And if the Obama administration is truly worried about whether it will do so, then it should urge Congress to pass the legislation proposed by Sen. Pat Toomey (R., Pa.) requiring the Treasury Department to pay those bills first. It is true that, once we had paid our debt-service bills, there wouldn’t be enough money left over to pay for everything else the Obama administration wants to spend money on. The government would have to prioritize its expenditures — sending out checks for the troops’ pay and Social Security first. Other spending would have to wait. Treasury Secretary Tim Geithner says that not spending money Congress has appropriated is “the same as default.” It is not. It is economizing, which is what you do when you are out of money.
The Daily Hatch 
