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    • Editor

    Data Matters: G-7 GDP growth since summer 2009

    | May 15, 2012 | 4:44 pm

    Here is the second installment in our new series Data Matters.

    Following last week’s inaugural post of data from John Cogan, this week Edward Lazear, a Hoover Senior Fellow, Stanford Professor of Economics, and former Chairman of the Council of Economic Advisers, offers us a comparative assessment of U.S. economic growth since the summer of 2009. The chart shows average GDP growth in the G-7 countries, including the Q1 2012 preliminary figures.

    Since we began to emerge from the economic wreckage of the Financial Crisis, the U.S. has experienced stronger economic growth than France, Italy, Japan, and the U.K. But economic growth in Germany and Canada has outstripped growth in the U.S. The pattern in the data is materially the same if we move our end point back to Q4 2011.

    The potential for a stronger economic recovery demonstrated by two of our peers supports a reassessment of the U.S. government’s response to the Financial Crisis and economic policy actions over the last three years.

    With Data Matters, we highlight data relevant to public policy that Hoover fellows are using in their research. We feature original data, data from another source that Hoover fellows are presenting in a new way, or data that fellows find helpful in shaping their own thinking.

    Sign up for the Advancing a Free Society RSS feed to follow our data stream.

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    James Ceaser

    Obama, Romney, and Equality

    | May 14, 2012 | 6:00 am

    If the test of a clever orator is the ability to sell two incompatible positions at the same time, President Obama must already rank as one of the most adept rhetoricians in American history. The President steadfastly disavows any intent to foment division between economic classes, even as he works at every step to denounce the wealthy. At Osawatomie, Kansas last December, in what was billed as an historic speech on his governing philosophy, Obama insisted “this isn’t about class warfare,” and then went on immediately to attack “the breathtaking greed of a few” and “mortgage lenders that tricked families into buying homes.”

    These lines were a throwback to the class rhetoric not only of Theodore Roosevelt, whose speech President Obama was channeling, but also of cousin Franklin, who fulminated in his First Inaugural against “the unscrupulous money changers [who] stand indicted in the court of public opinion.” These attacks are ostensibly not on the rich themselves, but on the undeserving rich. These poor souls were formerly characterized mostly by their practices and disposition (unscrupulousness and greed) and their occupation (finance). President Obama has added a political dimension: refusing to buckle to his idea of paying a “fair share.” The good or deserving rich, by contrast, are those like Warren Buffet, George Clooney, and Jon Corzine, who abhor the Bush tax cuts.

    In the selection of Mitt Romney as the Republican nominee President Obama has found a target too rich to pass up.

    Click to read more.

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    Kori Schake

    Caveat Inauguror

    | May 10, 2012 | 10:10 am

    The government of China has just given yet another reason investors should be wary of operating in the Chinese market.  The Chinese Ministry of Finance has announced regulations, requiring western auditing firms to give control to local partners by the end of 2012, effectively ending the independence of firms operating in the Chinese market.

    This comes on the heels of several high-profile cases of accounting fraud in recent years, and the Securities and Exchange Commission charging accounting firm Deloitte for refusing to hand over documents in a fraud case of a Chinese firm listed in the U.S. (Deloitte claims it would violate Chinese law to do so).  The Finance Ministry’s action will be read as validating concerns about the opaque and often corrupt practices of Chinese firms.

    Given the collusion of Chinese government and business, both through state-owned firms and politicized decisions on everything from bank lending to police investigations, the regulatory take-over of auditing firms bodes ill for investors getting reliable information on the business practices of companies in which they take an interest.

    Academics and politicians often marvel at what French Finance Minister (and later President) Valery Giscard d’Estaing called the “exorbitant privilege” that accrues to the United States by the U.S. dollar being the world’s major holding currency.  And it is a privilege, often undeserved by us, as now, when our government proves unwilling to make sensible choices about economic fundamentals such as debt reduction.  But it merits remembering that American dominance is not alone a function of American choices.  It also results from the choices of others.

    For all the talk of a rising China, they are making quite a number of choices that will keep the dollar a safe harbor of value and call into question the reliability of information so important to encourage investment.  China may not rise either so far or so fast as predicted unless they reform the crony authoritarianism that looks to be the hallmark of their economic model.

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    Editor

    Data Matters: A Tale of Two Budgets – Obama & Ryan

    | May 08, 2012 | 3:41 pm

    Today, we add a new weekly feature to Advancing a Free Society. Each week, usually on a Monday, we will highlight data relevant to public policy that Hoover fellows are using in their research.

    Our inaugural data post is a graph generated by John F. Cogan, the Leonard and Shirley Ely Senior Fellow at the Hoover Institution and a professor in the Public Policy Program at Stanford University. The graph shows federal government outlays as a percent of GDP from 1994 to 2022. The graph presents historical outlays and the striking contrast between two different future scenarios: one that follows the Obama administration’s budget and the other that follows the budget path that would be created under Paul Ryan’s plan.

    Sign up for the Advancing a Free Society RSS feed to follow our data stream.

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    Terry Anderson

    The Sport of Kings

    | April 30, 2012 | 2:46 pm

    I am planning a trip to Spain to archery hunt for Spanish ibex, a magnificent wild goat. The hunt will cost several thousand dollars, not counting the money for airfare, hotels, and food. I’m wondering, however, if I should still go or cancel the trip and follow the lead of Spain’s King Juan Carlos by recanting my sin of hunting.

    King Juan Carlos recently went on safari to Botswana where he allegedly hunted elephant. While there he broke his hip and returned home for treatment. Spanish newspapers reported the story including a picture from a previous hunt showing the king standing in front of a dead elephant with a rifle.

    The story sparked outrage from citizens who feel the king abdicated his responsibility by enjoying himself on safari while his subjects suffered under the Spain’s worsening financial crisis. Socialist Party leader, Tomas Gomez, said the king should choose between his “public responsibilities or an abdication.”

    In response the king appeared on television as he left a Madrid hospital saying, “I’m very sorry, I made a mistake. It won’t happen again.”

    The outrage goes beyond the economy to the environment. The king is the honorary president of the Spanish branch of WWF, one of the world’s largest environmental groups. Because of his hunting escapade, members have gathered 65,000 signatures on a petition calling for Juan Carlos to resign his honorary presidency.

    Click to read more.

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    Tom Church

    Diamond and Saez Ignore the Effects of Higher Marginal Tax Rates

    | April 25, 2012 | 9:42 am

    Yesterday’s Wall Street Journal op-ed by Peter Diamond and Emmanuel Saez received quite a reaction. Diamond and Saez advocate raising the top marginal tax rates on the rich to between 50-70%. Their recommendation is based on a 2011 paper they published in the Journal of Economic Perspectives (PDF) where they advocated 1) Raising marginal tax rates on the very rich, 2) Subsidizing earnings (phasing out at a high rate) for low earners, and 3) Taxing capital. Their paper was widely discussed when it was published, and it is serving as a justification for many on the left to raise taxes on high-income earners. It’s their first recommendation that I would like to address.

    There are several key limitations with the authors’ methodology used to conclude that raising marginal tax rates is optimal social policy. Two I’ll mention here are the dynamic effects of raising marginal tax rates in the medium and long term, and the volatility that comes with higher rates on a small portion of the population.

    First, and this is the most important issue with the paper, Profs. Diamond and Saez are unable to produce estimates of the effect higher marginal tax rates have on economic growth or tax revenues in the medium or long term. (I’d note that Scott Sumner highlighted the following excerpt months ago. Still, it should be front and center of the criticism of their recommendation.) From their paper:

    It is conceivable that a more progressive tax system could reduce incentives to accumulate human capital in the first place. The logic of the equity-efficiency trade-off would still carry through, but the elasticity e should reflect not only short-run labor supply responses but also long-run responses through education and career choices. While there is a sizable multiperiod optimal tax literature using life-cycle models and generating insights, we unfortunately have little compelling empirical evidence to assess whether taxes affect earnings through those long-run channels.

    Translated: We don’t know what will happen in a few years as a result of this change.

    Click to read more.

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    Kori Schake

    Sarkozy’s Troubles

    | April 23, 2012 | 9:01 am

    France held the first round of its presidential elections over the weekend, and it spells real trouble for President Sarkozy — and German Chancellor Merckel.  Sarkozy took only 27% of the vote, bested by the socialist party candidate, Francois Hollande.  The far left candidate pulled in 11% and can be relied on to offer that to Hollande.  The far right took 18%, but their leader shows no inclination to back Sarkozy.  Absent an April Surprise, it’s difficult to see how Sarkozy gets reelected on May 6th.

    Hollande, the socialist, has run a campaign critical of Sarkozy’s divisiveness, and of the EU approach to its financial crisis.  He got a boost early on from German Chancellor Merckel endorsing Sarkozy — French voters prefer the image of a smart French rider astride a strong German horse to that of a bossy teuton meddling in French elections.  Hollande campaigned vigorously on his opposition to the “Merkozy”

    In an effort to stave off Eurozone collapse, Chancellor Merckel has intimidated other European leaders into an austerity first strategy.  It is now reaching its political limits of acceptability not only in the political periphery of Greece, Spain, Portugal and Italy, but also in the bedrock of the Eurozone.  The honeymoon is over for technocratic governments in Greece and Italy; both are threatened by elections to overturn austerity.   Spain failed to meet its budget cuts and the newly elected government is facing a public backlash.  Even the Netherlands is likely to call elections after their government failed to agree on needed spending cuts.

    Click to read more.

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    Paul Gregory

    A Caveat for Krugman

    | April 16, 2012 | 6:40 am

    Critics of my blog post How Krugman Would Ru(i)n Steve Jobs’ Apple point out that Paul Krugman has a Nobel prize in economics and I do not. I should shut up in the face of a superior authority. If Krugman were writing about his specialty, international trade theory, I might indeed shut up. When Krugman puts on his political hat, he is fair game.

    In his Jobs, Jobs, and Cars, Krugman uses bad economics that would shame an introductory economics lecturer. He criticizes Apple because its labor force is too productive. (His figures show that Apple has about the same sales revenue as GM but has one fifth the work force).  By being so productive, Apple creates too few jobs! Let economists chew that one over. Krugman would be in agreement with Marx’s discredited technological unemployment.  I guess the solution is for Apple employees to become as unproductive as GM workers.

    In the same article, Krugman criticizes Apple for outsourcing routine manufacturing operations to Asia. Isn’t this what trade economists call the international division of labor? How can a trade theorist be against this practice? I guess he thinks Apple should keep routine manufacturing jobs at home even if it means higher consumer prices, loss of market share and profits.

    Krugman seems to hold the strange opinion that the business of business is to create as many jobs as possible. Last time I looked at a principles of economics text, I learned that business are there to produce products that people want as cost-effectively as possible, in the course of which the business earns profits for its owners. I guess we need to recall all economics texts.

    Click to read more.

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    Kori Schake

    Spain at the Precipice

    | April 15, 2012 | 12:14 pm

    Tuesday of this week the government of Spain must return to financial markets to auction 12- and 18-month treasury bills.  Thursday the Spanish government will float two- and ten-year bonds.  While the specific amounts are not yet announced, the government has only financed half of its 2012 debt needs.

    Just released Bank of Spain data shows that Spain accounts for 28% of all European Central Bank lending since December, when the ECB set about injecting a tidal wave of liquidity into the seizing European banking sector.  Spain has soaked up $316 billion of the roughly $1 trillion the ECB pumped into Europe in the past six months.  Despite even that injection of capital, Spanish borrowing costs are once again what they were before the ECB effort, and the pace at which banks are resorting to the ECB has tripled since November.

    The political maneuver decided on by the ECB — to offer cheap loans that banks could use to purchase government debt (shielding government from markets) — was necessitated by the EU treaty’s prohibition on the Bank loaning money directly to governments.  And the triangulation has actually worked.  But the European Central Bank has concluded its priming of the pump and has neither plans nor money in its bail out funds to revisit that decision.  Nor would Spain meet the EU bail-out criteria, having just announced it is increasing its deficit projections for the year beyond that agreed with the EU.

    The bank data reveal that markets have deserted both Spanish government securities and Spanish banks.  Banks could not raise cash in the market; government bonds were not being bought other than by Spanish banks.  It also means the ECB has huge exposure to a Spanish default — virtually guaranteeing that the European Union will need to bail Spain out, if only to prevent the ECB from crashing when Spain falls.

    If Spain should fail to meet its capital requirements on Tuesday and Thursday, it could easily trigger a flight from Spanish banks, government intervention to prevent their collapse, and then necessarily an EU bailout of Spain to keep the ECB from being dragged down by a Spanish default.

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    Charles Blahous

    More on the budgetary effect of health care reform

    | April 11, 2012 | 4:58 pm

    Today Avik Roy of Forbes kindly provided me with a forum for responding to some of the questions that have arisen about my study showing that the 2010 health care reform law will add substantially to federal deficits.

    The full paper, again, is here.

    The Forbes blog is here.

    Excerpts from the Forbes blog post:

    The paper was subject to a double-blind peer review process, which means I did not know who was reviewing the paper, and the reviewers did not know who had written it.  Prior to this review process, I also independently had the paper reviewed by several fellow federal budget and health care financing experts to confirm that the analysis was correct.  Few of the criticisms of the paper have been substantive. I do not believe the few substantive criticisms hold water for the following reasons:

    Click to read more.

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    Bill Whalen

    Exit, Stage Right

    | April 10, 2012 | 12:45 pm

    Gettysburg, Pennsylvania: “High-water mark of the Confederacy” and low water mark of Rick Santorum’s presidential campaign, which came to a sudden halt on Tuesday (technically, his campaign was “suspended”, meaning the former Pennsylvania senator can still raise money and remain on the ballot at the national convention).

    A few thoughts:

    1)  A No-Brainer. This was the only sensible choice facing Santorum. He could have soldiered on, more than likely losing the primary in his native state on April 24. Had he then carried his campaign past that humiliation and into May, Santorum was looking at making a lot of enemies among Republican higher-ups – enemies with long memories. Which leads us to . . .

    2)  2016. So what happens if Romney, now the nominee-in-waiting, fails to unseat President Obama this fall? Santorum will celebrate his 54th birthday next month. That makes him a pup in the dog’s life of Republican presidential hopefuls. George W. Bush was the same age – 54 – when he won the presidency in 2000. Otherwise, it’s an older man’s game – Romney turned 65 last month; John McCain turned 72 during the 2008 general election; Dole was 73 when he was the Republican nominee back in 1996; George H.W. Bush was 64 when he won the presidency in 1988, succeeding Ronald Reagan who was a few days shy of his 70th birthday when he took office in 1981. The point is: Santorum is still young enough to have a future (as some evangelical conservatives have reminded him), which probably factored into his decision to exit gracefully.

    Click to read more.

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    Bill Whalen

    Plenty of Pizza…But Not Enough Dough

    | April 09, 2012 | 3:03 pm

    Apparently, not everyone’s feeling the pinch of this recession.

    According to published reports, President Obama will travel to Detroit on April 18 for what the local media have dubbed a “$1 million pizza party”.

    The party’s hostess: Denise Ilitch, daughter of Little Caesars’ founders Mike and Marian Ilitch (dad also owns the Detroit Tigers; the daughter flirted with a run for governor of Michigan back in 2010).

    It won’t take a large crowd to hit that $1 million target: invitees are being asked to cough up $40,000 to attend a cocktail reception/dinner/presidential photo-op; $10,000 gets you dinner and a photo.

    And, presumably, all the pizza you can eat – “we’ll be serving it on sterling silver plates,” Ms. Ilitch quipped (hey, at least she didn’t say: “Let them eat pie”).

    (Btw, to show that a change in baseball ownership can also mean a change in political philosophy: the previous owner of the Tigers, Domino’s founder Tom Monaghan, is a staunchly conservative Catholic and donor to Republican causes.)

    Getting back the politics of pizza and campaign dough, you can expect plenty more money stories like this in the weeks ahead. And that’s because:

    Click to read more.

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    Kori Schake

    Further Politicizing Intelligence on Iran

    | April 08, 2012 | 9:00 pm

    Sunday’s Washington Post featured an extensive article titled “U.S. Sees Gains in Iran Intelligence,” that details efforts by American intelligence services to penetrate Iran’s nuclear program by both technical means and human agents.  Sources in the article describe U.S. drones flying undetected over Iran, the CIA working through countries in the region to place spies in Iran and connect to knowledgeable Iranians.  The tone of the article is self-assured, conveying the message that Iran is not building a nuclear bomb.  It might more accurately be titled We Know What We’re Doing, under the Obama Administration’s byline.

    The article is anonymously sourced by “seven current or former advisers on security policy who agreed to discuss U.S. options on Iran.”  Far from being a journalistic scoop of clandestine intelligence operations, the article should be read as a policy gambit by the Obama Administration.  They are attempting to discredit the need for an attack on Iran’s nuclear facilities.

    Click to read more.

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    Gary Becker

    Restrictions on Campaign Contributions—A Good Thing?

    | April 08, 2012 | 4:40 pm

    Posner is clearly correct that the analytical differences between “super Pacs” and direct campaign contributions to candidates are not large enough to justify disparate treatments. Yet, because they should be treated the same way does not necessarily imply that spending by super Pacs should also be sharply controlled. I believe that it is very likely  preferable to apply the reasoning in Citizens United v. Federal Election Commission to direct contributions than to extend the limits on direct contribution to super Pacs.

    I agree with Posner that candidates with political positions attractive to rich individuals may obtain considerable funds that give these candidates political advantages in appealing to voters. Such political contributions may well also affect the policies supported by candidates and elected officials. This is the corruption issue raised by Posner and by much of the literature that supports sharply limiting campaign contributions.

    Sharp restrictions on campaign contributions would make more sense if monetary contributions were the only major force that shapes who wins elections and the policies goverment officials support.Yet that is very far from the situation that prevails in American politics, and in the politics of most other democratic nations. One reason for this is that interest groups can often avoid the intent of restrictions on campaign contributions through other ways to influence political outcomes. For example, many industries hire lobbyists and spend other monies to try to persuade legislators, regulators, and others in important political positions to subsidize their industries, or to reduce the taxes on their industries, or to gain other advantages.

    Continue reading Gary Becker…

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    Paul Gregory

    The Tea Party Already Saved Taxpayers $300 Billion (Maybe a Half Trillion)

    | April 08, 2012 | 8:57 am

    A “counterfactual” is an analysis of “what would have happened if.” President Obama’s claim that “the stimulus added as many as 3.3 million jobs” is the most famous example of this genre.

    Counterfactual analysis of the effects of the 2010 election on federal spending can be executed, unlike the jobs-saved analysis, on a more solid foundation with nothing more than a pocket calculator. The procedure is simple: First, we find what the Obama administration intended to spend in 2011 and 2012 on the eve of the November 2010 election (and not knowing that an electoral disaster lay in store). Second, we compare these figures with what was actually spent in 2011 and what is likely to be spent in 2012.  For example, if the administration planned to spend $3 trillion in 2011 but actually spent $2.5 trillion after the Republicans gained the House, the “counterfactual saving” for 2011 is $.5 trillion.

    According to my arithmetic, the unanticipated Republican November 2010 sweep of the House with victories of fiscally-conservative freshmen saved or will save taxpayers at least $300 billion dollars for the two-year period 2011 and 2012 alone – a figure that may understate the saving by another two hundred billion.

    Continue reading Paul Gregory…

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    Scott Atlas

    The Picture of Health

    | April 07, 2012 | 9:13 pm

    From the facts, we know that Americans enjoy outstanding access and quality in their health care system. The only real “crisis” in America’s health care today is the unsustainable, increasing burden of health care costs on the government budget and the economy. The federal budget is directly affected by the rising cost of health care in two major ways: first, Medicare and Medicaid outlays increase as the population ages and as medical practice expands along with more advanced interventions; and second, tax subsidies for health care are massive, and they increase as the cost of tax-sheltered insurance rises.

    According to the Centers for Medicare and Medicaid Services (CMS), total health spending has reached about $2.6 trillion, amounting to 17.6 percent of GDP in 2010. Although part of the rise results from a predictable growth in the number of aged beneficiaries, more of it is attributed to the way costs per beneficiary are expected to continue growing faster than per capita GDP. National health spending is expected to rise 5.8 percent per year from 2010 through 2020, culminating in a 19.8 percent share of GDP by 2020.

    If such excess growth—as economists call it—continues as projected, federal spending on health care alone will approach the total amount collected in federal tax revenues within fifty years.

    Continue reading Scott Atlas…

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    Kori Schake

    Back to the (Uncertain) Future

    | April 07, 2012 | 7:19 pm

    President Obama has not taken our country’s precarious debt situation seriously. When forced by Congress to revise his budget earlier this year, Defense was the only department targeted for cuts. Last summer’s Budget Control Act legislated further reductions for this year’s budget and portends even more significant cuts in the out years of the coming decade. Obama and Defense Secretary Leon Panetta recently unveiled a sensible set of choices for the coming year, but unfortunately failed to account for hundreds of billions of dollars that still must be found under the terms of last summer’s legislation. Unless they provide a better blueprint for spending, across-the-board cuts will come into effect in January 2013. And, as Panetta himself has said, not just the budget choices but the entire Pentagon strategy would collapse with any further cuts.

    In addition to producing a budget willfully ignorant of further cuts, the White House has avoided any serious discussion of the hazards of cutting spending this deeply. The president is trying to have it both ways, cutting defense while pretending there is no risk associated with the cuts. At his Pentagon press conference in January, Obama said that “yes, our military will be leaner, but the world must know—the United States is going to maintain our military superiority.” But neither he nor Panetta has produced a plan that gives credence to the claim.

    Continue reading Kori Schake…

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    Robert Barro

    Scrap the Euro Now

    | April 07, 2012 | 6:25 pm

    Until recently, the euro seemed destined to encompass all of Europe. No longer. None of the remaining outsider European countries seems likely to embrace the common currency. Seven Eastern European countries that recently joined the European Union (Bulgaria, the Czech Republic, Hungary, Latvia, Lithuania, Poland, and Romania) have announced their intention to revisit their obligations to adopt the euro.

    Two non-euro members of the European Union, the United Kingdom and Denmark, have explicit opt-out provisions from the common currency, and popular opinion has recently turned strongly against euro membership. In Sweden, which lacks a formal opt-out provision (but has cleverly refused to fulfill one of the requirements for membership), a November poll on whether to join the euro was overwhelmingly negative: 80 percent no, 11 percent yes.

    In light of the political response to the ongoing fiscal and currency crisis—which is leaning strongly toward a centralized political entity that will probably be even more unpopular than the common currency—I suggest that it would be better to reverse course and eliminate the euro.

    Continue reading Robert Barro…

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    Victor Davis Hanson

    Dependent No More

    | April 07, 2012 | 5:49 pm

    There is a revolution going on in America, but it is not driven by the tea party or the Occupy Wall Street protests.

    Instead, massive new reserves of gas, oil, and coal are being discovered almost everywhere in the United States, thanks to revolutionary methods of exploration and exploitation such as hydraulic fracturing (fracking) and horizontal drilling. Recent prices above $100 a barrel make even difficult efforts at recovery enormously profitable.

    There were always known to be additional, untapped reserves of oil and gas in the petroleum-rich Gulf of Mexico, off America’s shores, and in the American West and Alaska. But even the top energy experts never imagined just how vast was the energy there—or beneath far more unlikely places such as South Dakota, Pennsylvania, Ohio, and New York. Some studies suggest that the United States has now expanded its known potential gas and oil reserves tenfold.

    The strategic and economic repercussions of these new finds are staggering, and remind us how a once energy-independent and thereby confident American economy soared to world dominance in the early twentieth century.

    America will soon again be able to supply all of its own domestic natural gas needs—and do so perhaps for the next ninety years, at present rates of consumption. We have recently become a net exporter of refined gas and diesel fuel, and already have cut imported oil from OPEC countries by one million barrels per day.

    Continue reading Victor Davis Hanson…

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    John Taylor

    Getting Back on Track

    | April 07, 2012 | 4:35 pm

    A lot of people are wondering what we can do to restore America’s prosperity and create more jobs. Both the president and his Republican rivals have offered their ideas in this election year. I believe the fundamental answer is simple: government policies must adhere more closely to the principles of economic freedom upon which the country was founded.

    At their most basic level, these principles are that families, individuals, and entrepreneurs must be free to decide what to produce, what to consume, what to buy and sell, and how to help others. Their decisions are to be made within a predictable government policy framework based on the rule of law, with strong incentives derived from the market system, and with a clearly limited role for government.

    The history of American economic policy displays major movements between more and less economic freedom, more and less emphasis on rules-based policy in fiscal and monetary affairs, more and less expansive roles for government, and more and less reliance on markets and incentives. Each of these swings has had enormous consequences. Taken together, they make for a historical proving ground to determine which policy direction is better for restoring prosperity.

    Continue reading John Taylor…

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