I’ve thought that there was some credence to be given to the flypaper theory–fight the terrorists there so we won’t have to fight them here–as applied to Iraq. With the recent London bombings as background, Gregory Scoblete convincingly argues that Iraq-as-flypaper is a flawed theory.
The strategy of aggressively preempting terrorists and terror-threats, the essence of the administration’s counter-terrorism policy, is fundamentally sound. The problem begins when the pitched battle between Jihadists and U.S. forces in Iraq is framed as an either/or equation — either we fight terrorists in Iraq or we fight them here — because the reality, as London, Madrid, Turkey and the entire tragic litany demonstrates, is that we’re fighting them everywhere. That Iraq has attracted the flies is both true and largely irrelevant; the flies continue to murderously alight elsewhere, despite our presence in Iraq. . .
The idea that Iraq is an irresistible magnet for jihad, diverting the radicals’ attention from U.S. domestic targets, assumes that there is a hard-and-fast number of holy warriors and that once they enter the killing fields of Iraq in sufficient numbers our troubles will be over. It also ignores the still open question of whether the conflict is motivating Muslims who would otherwise have demurred from martyrdom to join the fight and thus constitute a seemingly limitless suicide assembly line. [emphasis in original]
I concur. It really isn’t an either/or choice, as London and Madrid have reminded us. Thus, Scoblete is accurate when he further explains that Al-Qaeda is too decentralized and “that the ‘central battlefield’ on the war on terror is wherever a suitably fanatical Muslim is prepared to blow him/herself up. That U.S. forces are decamped enticingly in Iraq does not mean that terrorists will forsake Western targets.” Iraq is the biggest front, but not the only front.
Yet, this leads me to a criticism of Scoblete’s belief that there is still an “open question” regarding the War in Iraq as the centerpiece of jihadist motivation. He should know better. It is more than mere mantra to say such things as “9/11 happened before Iraq.” And as the blogger Callimachus reminds us:
But wait, weren’t we told not too long ago it was all about Israel? And that they were all on fire over the defiling presence of U.S. military boots way on the other side of the Land of the Two Holy Mosques?
Face it: there’s a simmering stew of resentment among a vast pool of Muslims over a broad swath of the earth. Many sticks can stir the pot. If a more potent one comes along, the stirrers will use it till they find an even better.
In essence, while Scoblete is correct that Al-Qaeda is too decentralized for us to think that all of their jihadist eggs will be broken in the Iraq basket, he shouldn’t buy into the belief that Iraq is a unique, or even the primary source of jihadist fertilizer. In fact, why Iraq and not Afghanistan?
The answer is because, unlike the War in Afghanistan, the War in Iraq has caused a rift in the West which Al-Qaeda has sought to exploit. In this, they have succeeded. They have picked up on the Western rhetoric espousing the illigitimacy of the “War for oil” and used it to add a kind of warped legitimacy to their terrorism. As such, their own rhetoric is both derivative of, and buttressed by, that of Western critics of the War in Iraq. (This does not mean that Western critics are conscious, or even unconscious or subconscious, supporters of terrorism. Nonetheless, like it or not, their words are being used by those who commit terrorism). In a society already predisposed to have a strong dislike for the Western “other,” stories that support these predispositions, especially when accompanied by the “confessions” of those from the West, are extremely attractive. The result is a strengthening of both the appeal and apparent legitimacy of the ideology of radical Islam, particularly Al-Qaeda’s strain, among those ready to receive it.
Scoblete touches upon the inherent strength of organizational decentralization, but he doesn’t really say why it is effective. The reason decentralization is so effective for Al-Qaeda is because the organization of Al-QAeda has succeeded in installing the ideology of Al-Qaeda as preeminent throughout radical Islam. In essence, the ideology has superseded the organization itself. As such, while Iraq has been used effectively as a recruiting tool and rhetorical touchstone, there were, and will be other, perceived “insults” to Islam that will be used as legitimization for jihad. There is still Israel, after all. It is correct to say that Iraq is not the only front in the War on Terror. It also isn’t the only reason for it.
Implicit in the public debate about the upcoming Supreme Court nomination is the assumption by many on the left that any nominee by President Bush is going to be an activist from the right who will seek to undo the aggressive legislating done by the Court in recent years with an equally aggressive counter response. Such a belief reduces the debate to nothing more than a raw power struggle between competing interests. And it completely misses the real point of the judicial activism debate.
Power Line, which is run by lawyers, offers all of us an insightful look at the question of judicial activism and how original intent leads to judicial restraint, not conservative judicial activism, and most certainly does not equal liberal activism:
…The fallacy here is in defining judicial activism and restraint as willingness to vote, respectively, to overturn and uphold legislation. If one accepts this definitional framework, then the moral equivalency argument sounds plausible. But if one defines activism and restraint more sensibly, based on the way judges interpret the Constitution, the argument collapses.
The key distinction here is that conservative judges tend to determine what the Constitution does and doesn’t protect and prohibit based on a careful reading of what the Constitution says and how it originally was understood. Liberal judges tend to determine the meaning of the Constitution based on their policy preferences, and because those preferences often bear little relation to those of the Constitution’s drafters, they rely on whatever they can get their hands on. It may be true that conservative judges often vote in support of their policy preferences too. But, as conservatives, their policy preferences are likely to reflect the traditional preferences and values that the authors of the Constitution believed in and set forth in the document…
…Policy preferences that aren’t rooted firmly in that document should be for legislatures, not courts, to impose.
Those of us who believe in an original intent approach to judicial behavior believe that legislatures are the place where democratic processes should play out in order to build a public consensus on important policy matters. It takes time and it frequently seems like a messy, inefficient process. But, consider the horrible alternative we now live with: When the Supreme Court legislates on policy matters, it immediately stops any public debate before there has been sufficient time to develop a public consensus. As a result, their action immediately yields a polarization on the topic which, as the abortion issue has shown, makes reasoned debate and building a public consensus practically impossible. We have become a more divided society due to judges legislating from the bench.
This issue has been discussed in previous postings entitled “The Supreme Court Has Converted Itself From a Legal Institution to a Political One” and Rediscovering Proper Judicial Reasoning.
Two political issues, important to concerned citizens here in Rhode Island, arose at the end of the legislative session here in Rhode Island.
The first issue, as reported in this ProJo article, is about lobbyist spending disclosure requirements:
…Fending off cries from Common Cause of Rhode Island and Secretary of State Matt Brown that their actions would gut the state’s spending disclosure requirements for lobbyists, the House voted 41 to 20 in favor of exempting what could be a vast swath of sales and purchases made by people and companies seeking to influence the General Assembly.
Brown has interpreted the law, made stricter in the wake of conflict-of-interest charges against key senators, to mean that lobbyists must reveal anything of value they sell to or buy from a lawmaker — whether it be home telephone service supplied, a slice of pizza bought at a lawmaker’s restaurant, or something larger.
The bill, from House Majority Leader Gordon D. Fox, D-Providence, would exempt the disclosure of the sale or purchase of goods and services “in the ordinary course of business and for fair market value.”
“Employment and consulting contracts” and “fees” still would have to be reported.
The change was supported by lawmakers such as Crowley, a restaurant owner; and Rep. Carol Mumford, D-Scituate, who has a family Christmas tree farm.
House Finance Committee Chairman Steven M. Costantino, D-Providence, said requiring the disclosure of everyday sales and purchases “just doesn’t seem practical in the world that we are in, especially a part-time legislature where we all have businesses.”
But many argued in favor of a proposal from Rep. John Savage, R-East Providence, to put a cap in the bill. Savage initially proposed requiring a lobbyist to disclose anything purchased from a lawmaker worth $250 or more; he later agreed to raise the figure to $1,000.
Said Rep. Al Gemma, D-Warwick, in support of a cap: “You can’t make a crook out of an honest man . . . however, it’s perception, it’s transparency.”
But Crowley said the information, once disclosed, would be used against lawmakers — in a newspaper story or by an opponent in a campaign. He said a truly crooked lawmaker would still do backroom deals that wouldn’t be disclosed, but someone like himself, who might get paid a large tab for a wedding or a company party, would lose business or suffer from the perception that there was “some kind of shady exchange.”
Savage’s amendment failed on a rare tie vote, 31 to 31, before the bill was approved.
Later, the Senate also approved the measure, after defeating an effort by Senate Committee on Government Oversight Chairman J. Michael Lenihan, D-East Greenwich, to add the same $1,000 cap debated in the House. The amendment failed by a vote of 22 to 10, and the proposal then passed by a vote of 24 to 7.
A second issue involved electronic filing of campaign contribution reports:
The House also passed a Senate bill that retroactively exempts candidates from filing their campaign finance reports electronically. Lawmakers called the requirement too onerous and agreed to delay its effect until 2007; the bill needed one final Senate vote before it hit the governor’s desk.
I find this exemption to be offensive. Since when has government ever retroactively waived regulatory requirements on businesses and citizens or paused to consider how they might create onerous demands on any of us?
Yet, the Rhode Island legislators – which have given us ample evidence of questionable ethics – vote to exempt themselves from the most basic of disclosure regulations necessary to bring transparency to important financial contributions that can drive votes on key issues.
You can read Common Cause’s viewpoint in opposition to both of these two bills here.
The following comments were made in a Wall Street Journal editorial (available for a fee) entitled Jayhawk Judgment:
…[In Kansas] the state Supreme Court has commanded that the legislature must increase spending on the schools, as well as the taxes to pay for it, by precisely $853 million over the next two years.
This week the legislature has been called into special session in Topeka by Democratic Governor Kathleen Sebelius (who also craves more spending) to comply with this court order. If the legislators do, they will essentially have handed the power of the purse and the power to tax over to six unelected and unaccountable judges.
Thankfully, some of the Republicans in the state legislature are not inclined to be bullied by the court. One of them is Senator Tim Huelskamp who describes the court decision as a “judicial shakedown of the citizens of Kansas for higher taxes.” The court counters that it is simply enforcing a provision of the Kansas Constitution that requires that the state provide “suitable provisions” for financing the schools.
But just what is a “suitable” amount? Kansas already spends a shade under $10,000 per student in the public schools — the most in the region and above the national average even though Kansas is a low cost-of-living state. Also ignored by the courts were the volumes of scientific evidence that the link between school spending and educational achievement is close to nonexistent. Perhaps one reason schools in Kansas aren’t as good as they might be is that the state ranks 47 out of 50 in education money that actually finds its way inside the classroom.
We should add that several other states — including Texas, New Jersey, Arkansas and New York — are now operating under court orders for more financing. The travesty of all these court interventions is that they promulgate the fundamental logical fallacy that has long undermined the U.S. public education system: that we should measure performance by inputs, not outputs. Every other industry in America is obliged to cut costs and get more for less; in education, parents and kids keep getting less for more…
The Kansas media are describing the hullabaloo in Topeka this week as a state constitutional crisis. And they are right. The legislature is sworn to abide by the Kansas Constitution, but that doesn’t mean abandoning its own powers of the purse to an unelected judiciary. This is a showdown between the branches of government, and the legislature has every right to protect its own constitutional prerogatives from judicial intrusion…
Adjusted for inflation, school spending per pupil has tripled over the last forty years and we have nothing to show for it. In the meantime, the performance of American public schools has continued to deterioriate to the point that we are putting the economic future of our country at risk.
And who is whining for more money while they continue to deliver lousy results? The public education bureaucrats and teachers’ unions. Consider the facts:
- They spend billions of dollars of our hard earned monies each year across America and NEVER deliver.
- They resist setting performance metrics for educational outputs.
- They resist merit-based incentive pay for the best teachers.
- They insist on giving the same salaries and salary increases to the best and worst teachers, just for showing up.
- They make it nearly impossible to fire the lousy teachers.
- They insist that seniority, not merit, determine who gets which teaching jobs.
- They block or attack charter schools.
- They attack any attempts at educational choice, including for children stuck in our worst, inner-city public schools.
The list could go on and on. And you know what boggles the mind? We listen to these people and pay attention to their drivel!
There is only one viable solution: school choice which puts creates an education marketplace where parents can make the right decisions for their children so all children can have a fair shot at living the American Dream.
The public education bureaucracy and teachers’ union will always continue to resist doing right by our children. The only way public education will ever get better is if we take away their ability to continue doing damage to our children’s future. For the sake of our kids, we have no other choice.
We must begin to measure educational performance by outputs, not inputs.
A debatable comment from the Providence Journal’s editorial about the London bombings:
Thursday’s attacks seemed clearly timed to coincide with the opening of the G-8 summit meeting in Scotland, where efforts to help Africa (home of almost 350 million Muslims) have been high on the agenda. Quite a gulf between that and Islamic terrorists’ agenda of establishing a religious totalitarianism in as wide a swath of the world as possible.
Perhaps there’s a “gulf” between opposing sides in the same fight, but Islamicists have every reason to resist economic improvement in Africa. A Dark Age ideology will fester better on a continent that’s kept in the dark.
Otherwise, apart from its ending with a vague and gratuitous reference to “our suicidal oil habit” (isn’t there oil in Africa?), the editorial is dead on.
My latest column for TheFactIs.org — “Reasoning with the Id” — responds to a recent piece by Lee Harris. To summarize too drastically, Harris seeks to find a place for tradition in a world of reason. Me, I think is more accurate to stress that rationality already exists in a world of tradition.
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This posting continues a discussion about General Motors and the UAW union covered in three previous postings:
If You Won’t Deal With Economic Reality, Then It Will Deal With You (includes heavy dose of United Airlines information, too)
Outrageous Employee Compensation Liabilities Continue to Haunt General Motors; Will American Taxpayers End Up Paying the Bill?
Why the Big Three Auto Companies Could Easily Fail
In a mid-June article in the Wall Street Journal entitled GM Warns UAW on Health Benefits (available for a fee), the following was reported:
General Motors Corp. has warned the United Auto Workers that the auto maker could unilaterally reduce health benefits for UAW retirees unless the union agrees to various cost-cutting concessions before its contract expires in 2007.
GM has set a goal of reducing the burden of its annual health-care costs by $1 billion in 2005 and another $1 billion in 2006, from a current estimated annual rate of $5.6 billion. The company also is aiming to reduce its long-term retiree health-care liabilities, an obligation that it carries on its balance sheet, by $20 billion from about $77 billion. But UAW leaders, who have conducted their own analysis, claim that GM’s targets are unrealistic, according to UAW officials.
GM is pressing the UAW to agree to concessions by the end of this month, according to people familiar with the situation. UAW officials have largely discounted that deadline, and there are growing signs that the UAW and GM Chairman and Chief Executive Officer Rick Wagoner could be headed for a clash.
At a UAW meeting June 9, according to two people present, UAW Vice President Richard Shoemaker told officials of union locals: “If GM does anything unilaterally, they’ll have a very hard time making automobiles in this country. You can go back and tell your membership that.”…
National UAW leaders informed local union presidents and other UAW officials at last week’s meeting that GM believes it has legal standing to reduce the health care of its retirees. Whereas the current labor contract provides specific benefits the company gives its current workers, the contract is less clear about benefits for retirees, according to some industry analysts. The UAW disputes that position.
People familiar with the situation say GM has implied in meetings with UAW officials that it could reduce the retiree benefits if the union doesn’t agree to several concessions that could help the company save billions of dollars over the next few years.
GM provides health insurance for about 1.1 million people in the U.S., of whom about 700,000 are covered under plans negotiated under the GM-UAW master agreement that expires in 2007. UAW members on average pay 7% of their health-care costs under those plans, compared with about 27% paid by GM salaried workers, according to figures provided by GM management. In March, the former head of GM’s North American operations, Gary Cowger, suggested in a speech that hourly and salaried workers should be covered by the same plan. UAW officials have publicly rebuffed that suggestion…
…[S]aid Rob Betts, president of UAW 2151, in Coopersville, Mich., a Delphi plant that makes fuel injectors: “We believe that they don’t have the right to do this. This money has already been earned. They can’t take it from us. They owe it to us.”…
The last time the UAW launched a major strike against GM, in 1998, GM production was crippled for nearly eight weeks and the disruption cost the company an estimated $2 billion…
…with GM’s North American operations facing their worst financial crisis since the early 1990s and GM’s debt rated at junk levels by two major credit rating agencies, Mr. Wagoner is under increased pressure to accelerate cost-cutting in GM’s U.S. auto business. At GM’s annual meeting earlier this month, Mr. Wagoner indicated GM will close more North American factories and continue to shed hourly workers through attrition…
In another Wall Street Journal article the next day entitled UAW Asks GM For More Time on Health Talks (available also for a fee), the following statements were made:
…In a joint statement, UAW President Ron Gettelfinger and UAW-GM Vice President Richard Shoemaker reiterated recent comments that the union won’t agree to reopen its current contract with GM before it expires in 2007 in order to accommodate GM management proposals to slash the company’s estimated $5.6 billion annual U.S. health-care bill.
But Mr. Gettelfinger and Mr. Shoemaker stressed a desire to maintain the spirit of cooperative labor-management relations that has largely characterized the UAW and GM management’s dealings since a costly eight-week strike in 1998.
It “is in the best interests of all GM stakeholders for the UAW and GM to work together on these issues — and to maintain the solid working relationship that we have worked so hard to build since 1998,” the UAW leaders said in their statement.
“By working together, the UAW and GM have done a lot of important things over the past several years, including making dramatic improvements in workplace safety, productivity and product quality. It would be a huge mistake for GM to throw all that away by taking any unilateral action on health care benefits or other matters covered by our national agreement,” the UAW leaders said…
One issue that could complicate talks between the company and the union is rank-and-file UAW displeasure at being asked to sacrifice benefits when Mr. Wagoner and other senior GM executives received bonuses for last year, and stockholders are still receiving dividends.
These people in Detroit are economic fools. 7% co-pays for union employees are an outdated historical artifact, especially when salaried employees are paying 27% – but the UAW won’t talk about it until 2007 “because they owe it to us.” Even if the payment of such benefits makes the company non-competitive in a global industry. No less outlandish is the continuing payment of bonuses to GM executives while they threaten to unilaterally reduce unionized worker healthcare benefits. As I have said before, these buffoons all deserve each other.
While the fools in GM management and the UAW union re-arrange the chairs on their economic Titanic, the competition is not waiting until 2007 to move ahead smartly. E.g., check out the newly built Hyundai plant in Alabama with its lack of healthcare legacy costs.
Here is another simple way to look at the issues here: Suppose you were a financial investor. Would you place your incremental investment dollar in the rigid, high-cost producer or the flexible, low-cost producer? Not a hard question to answer is it? And that’s why GM’s debt rating has been lowered recently to “junk” status, which means it is NOT investment grade debt.
If you won’t deal with economic reality, then it will deal with you – on its own terms. In other words, GM and the UAW will either adjust their cost structure to be globally competitive and do it in a timely manner or they will die a well-deserved economic death.
Of course there is one other alternative for the more cynically minded: GM and the UAW can do little-to-nothing and then turn to the meddlesome U.S. government for a bailout like the airline industry has done.
But be very clear about the consequences of such a bailout – it won’t make the underlying economic problem of being a high-cost producer go away and it will result in the working families and retirees of America paying what amounts to an extra tax so GM and the UAW can avoid making the kind of hard decisions American families make every day of the year to live within their budgets. Such a tax is neither fair nor just. And it makes no economic sense.
They need to get real in Detroit – all of them. And do it now.
Good economic outcomes typically happen when the government does not directly meddle in the marketplace but, instead, acts only to ensure the existence of the rule of law and property rights so third parties can enter into viable contracts as well as count on a level playing field for all participants in the market.
Bad economic outcomes typically happen when the government meddles in the marketplace. E.g., see this posting about the impact of government meddling in the healthcare marketplace.
The meddling typically creates new (and often unforeseen) behaviorial incentives for market participants to act in economically inefficient ways. As the cost of those inefficiencies grow, the government most often then further meddles in the marketplace and only compounds the problems they helped create in the first place.
The travails of the U.S. airline industry show how one bad government meddling begets more government meddling and creates incentives for avoiding dealing with economic reality – all at a greater long-term economic cost to taxpayers and/or consumers.
For example, consider the news in this WSJ article entitled Global Airlines Rise Above Crisis As U.S. Carriers Struggle (available for a fee):
At a time when many U.S. carriers are still struggling to survive, much of the rest of the global airline industry appears to have pulled out of crisis and is entering the summer travel season in its best shape in five years.
Carriers in Asia and Europe are starting to see cost savings from several years of difficult restructuring. Passenger demand is ballooning in many markets…That means some airlines are able to stanch their losses by raising fares — and some are even strongly profitable.
The big exception is in North America, where several giant carriers are operating either in or near bankruptcy-court protection. U.S. airlines have been filling planes to record levels recently, surpassing demand seen before the terrorist attacks of Sept. 11, 2001. Still, much of that traffic has been stoked by aggressively slashing fares.
The U.S. airline market is lagging behind the rest of the global industry for a variety of reasons. After reaching unprecedented heights in the economic boom of the 1990s, U.S. carriers were hurt worse by the Sept. 11 attacks. And the U.S. industry remains an uncomfortable mix of rabid competition and government intervention — such as loan guarantees and pension-obligation relief — that allows weak carriers to limp along far longer than ailing businesses do in other industries.
Outside the U.S., where Chapter 11 bankruptcy protection doesn’t exist and many governments lack funds to prop up airlines, carriers have been faced since 9/11 with restructuring or going out of business — and many have. Aiding the survivors, airlines outside the U.S. generally don’t face labor unions as strong as in the U.S., and few face the sort of free-for-all competition that U.S. carriers do…
“Operating fundamentals are probably as good as they’ve ever been” in the U.S., thanks to deep restructuring, “although balance sheets are not,” says John Heimlich, chief economist at the International Air Transport Association…
This nascent global pickup remains tenuous and could quickly disappear…
In Asia and the Middle East, airlines actually are growing, posting big profits, and appear to have shaken the crisis. The giant markets of China and India are deregulating and growing quickly. Carriers in the more mature markets of Japan, Southeast Asia and Australia-New Zealand also are expanding operations and renewing their fleets.
Airlines in the Asia-Pacific region started restructuring earlier than their peers in America and Europe…
“In Asia, we’ve got lower cost bases, tighter capacity and a much stronger demand recovery” than in the U.S. or Europe, says Kevin O’Connor, an analyst with investment bank CLSA Asia-Pacific Markets in Hong Kong…
In Europe, several large, traditional airlines and budget newcomers are reporting solid results…
“The results show that established carriers are able to deal with the cyclical crisis,” said Ulrich Schulte-Strathaus, secretary-general of the Association of European Airlines in Brussels…
But for most airlines in the U.S., which for years had some of the world’s strongest airline labor unions, slashing overhead remains a way simply to avoid insolvency. Rising jet-fuel prices have far outstripped most airlines’ ability to reduce overhead expenses such as labor…
Underfunded pension plans are another big drag on airlines. US Airways and UAL Corp.’s United Airlines, both of which are operating under Chapter 11 bankruptcy-court protection, were able to escape their obligations through bankruptcy proceedings…
The two carriers’ escape from their pensions has increased pressure on rivals to seek relief from their own burdens…
This attempt to help U.S. carriers is raising trade tensions within the inherently international industry, however…
“The U.S. government is subsidizing the airline industry,” charged Pierre-Henri Gourgeon, chief operating officer of Air France-KLM. In Europe, “where no subsidies are possible, market strength forces the industry to adapt.”
European Union officials have been strict since 2001 in limiting state money to airlines, and EU governments resisted paying for services such as airport security that politicians in the U.S. and some other countries have moved to underwrite…
Think about it: Government loan guarantees enabled inefficient airlines to survive without having to deal rigorously with their bloated, non-competitive cost structures. The problems were then only compounded by governmental policies that allowed United Airlines and USAirways to throw off their pension obligations. Which, predictably, is creating a reaction by the airlines which are still obligated to their pension liabilities as this next WSJ article entitled Delta, Northwest Seek Pension Aid; Senators Critical (available for a fee) shows:
[Open full post]In the June 13 edition of the Wall Street Journal, Stephen Moore wrote an editorial entitled Real Tax Cuts Have Curves (available for a fee):
…The Laffer Curve helped launch the Reaganomics Revolution here at home and a frenzy of tax rate cutting around the globe that continues to this day.
The theory is really one of the simplest concepts in economics. Yet its logic continues to elude the class-warfare lobby whose disbelief is unburdened by the multiple real-life examples which validate its conclusions. The idea is that lowering the tax rate on production, work, investment, and risk-taking will spur more of these activities and thereby will often lead to more tax revenue collections for the government rather than less.
In the 1980s, President Ronald Reagan chopped the highest personal income tax rate from the confiscatory 70% rate that he inherited when he entered office to 28% when he left office and the resulting economic burst caused federal tax receipts to almost precisely double: from $517 billion to $1,032 billion. [Remember these numbers the next time someone tries to tell you the deficits under Reaganomics were a revenue problem and not a spending a problem!]
Now we have overpowering confirming evidence from the Bush tax cuts of May 2003. The jewel of the Bush economic plan was the reduction in tax rates on dividends from 39.6% to 15% and on capital gains from 20% to 15%. These sharp cuts in the double tax on capital investment were intended to reverse the 2000-01 stock market crash, which had liquidated some $6 trillion in American household wealth, and to inspire a revival in business capital investment, which had also collapsed during the recession. The tax cuts were narrowly enacted despite the usual indignant primal screams from the greed and envy lobby about “tax cuts for the super rich.”
Last week the Congressional Budget Office released its latest report on tax revenue collections. The numbers are an eye-popping vindication of the Laffer Curve and the Bush tax cut’s real economic value. Federal tax revenues have surged in the first eight months of this fiscal year by $187 billion. This represents a 15.4% rise in federal tax receipts over 2004. Individual and corporate income tax receipts have exploded like a cap let off a geyser, up 30% in the two years since the tax cut. Once again, tax rate cuts have created a virtuous chain reaction of higher economic growth, more jobs, higher corporate profits, and finally more tax receipts.
This Laffer Curve effect has also created a revenue windfall for states and cities. As the economic expansion has plowed forward, and in some regions of the country accelerated, state tax receipts have climbed 7.5% this year already…Many of President Bush’s critics foolishly predicted that states and localities would be victims of the Bush tax cut gamble.
Alas, all of the fiscal news is not celebratory. The CBO also reports that federal expenditures are up $110 billion, or 7.2%, so far this year as the congressional Republican spending spree rolls on. Nonetheless, it now appears that the budget deficit will be at least $60 billion lower than last year and states and cities, led by California, which a few years ago were awash in debt themselves, will enjoy net surpluses of at least $50 billion. This means that total government borrowing will come in at below 2.5% of national output, which is hardly a crisis level of debt…
On the private-sector side of the ledger, what we are now witnessing is a broad-based investment boom. The lower capital gains and dividends taxes have been capitalized into higher stock values, and that in part explains why the Dow is up 24% since May of 2003 while the Nasdaq has risen 39%. Dan Clifton of the American Shareholder Association estimates that this rise in stock values has translated into roughly $3 trillion in added wealth holdings of American households. The severe slump in business capital spending in 2001 and 2002 has now taken the shape of a U-turn, with spending on capital purchases up an enormous 22% since 2003. Because higher wages and new job creation are highly dependent on business capital investment, the mislabeled “Bush tax cut for the rich” has in reality enormously benefited middle-income workers.
…Thanks to inane budget rules in Congress the capital gains and dividend tax cuts are currently set to expire in 2008. (When was the last time a spending program in Washington expired?) One thing would seem certain: Raising the tax rates on capital gains and dividends would be a formula for choking off the expansion and reversing the stock market climb. Until now, the Democrats in Congress have in unison sanctimoniously charged that the government can’t afford the price tag of making the tax cut permanent. But, of course, all this new fiscal evidence points to precisely the opposite conclusion: that we can’t afford not to make the tax cuts permanent.
Whether Mr. Bush’s critics’ ideological blinders make them capable of being persuaded by facts and evidence is an altogether different issue.
If you want even more empirical data, read this excellent article by Arthur Laffer, in which he presents historical data on the effects of marginal tax cuts from the Harding-Coolidge (1920’s), Kennedy (1960’s) and Reagan (1980’s) eras – which also turn out to be the three times of greatest economic growth in the last 100 years. In the article, Laffer explains the drivers which provide the underlying logic for the Curve:
The Laffer Curve illustrates the basic idea that changes in tax rates have two effects on tax revenues: the arithmetic effect and the economic effect. The arithmetic effect is simply that if tax rates are lowered, tax revenues (per dollar of tax base) will be lowered by the amount of the decrease in the rate. The reverse is true for an increase in tax rates. The economic effect, however, recognizes the positive impact that lower tax rates have on work, output, and employment–and thereby the tax base–by providing incentives to increase these activities. Raising tax rates has the opposite economic effect by penalizing participation in the taxed activities. The arithmetic effect always works in the opposite direction from the economic effect. Therefore, when the economic and the arithmetic effects of tax-rate changes are combined, the consequences of the change in tax rates on total tax revenues are no longer quite so obvious.
It is important to note that, in evaluating the effects of tax cuts, many opponents of such cuts (including the “pay as you go” budget deficit hawks as well as the methodology used by the Congressional Budget Office) only present a calculation of the arithmetic effect – called a “static analysis” – thereby assigning a zero value to the economic effect. Yet the empirical data from the three eras of tax cuts clearly show the error of that approach. That is why it is crucial that a “dynamic scoring” methodology be used, incorporating both arithmetic and economic effects. It is no less important to note that cash refunds from government, which do not change marginal tax rates, will have no lasting economic effect because they create no incentive to change human behavior and create new economic value.
Never underestimate the incentive power of marginal tax cuts. It’s Economics 101, after all.
