Since the passage of the “bipartisan” tax deal to extend the Bush tax cuts, the Republican Party has engaged in an argument with itself over the wisdom of what was enacted. Those on the more conservative side of the ledger argue that while the preservation of the current tax rates was absolutely imperative, the Republicans in Congress paid far too high a price to achieve that objective. They cite:

• The plethora of liberal goodies that Obama extracted as the price – extension of unemployment benefits, continuation of various targeted tax cuts and credits that do little but enrich the coffers of Democratic supporters, and the seemingly worthwhile but actually temporary and phony stimulus of a reduction in the payroll tax.
• The fact that the preservation of the Bush rates is again temporary – and at two years, ridiculously short – leaving continued uncertainty in the business community and the public in general about the future of tax policy in the nation.
• And most seriously, the lack of any corresponding spending reductions that would help to pay for the legislation and more importantly set the government on the path to fiscal responsibility as demanded by the voters on November 2.

Moreover, say conservative critics of the deal, we could have secured far better legislation if we had waited until the new Congress was seated. In fact, given that Obama had already acceded to the argument that not extending the rates would have brought renewed calamity to the economy, he would have had no choice but to go along with whatever the new Congress proposed, regardless that it would have addressed some or all of the criticisms just enumerated. Conservative, i.e., Tea Party critics of the bipartisan deal complain that it represents a sellout by the Republican Party to the big government mentality that continues to govern the nation and reveals that the GOP has learned little from the fundamental lesson that the voters offered up in the last election.

The “establishment” wing of the Republican Party is having none of this. According to the Mitch McConnells of the GOP, this was a huge victory for Republicans and conservatives. According to their reading of November’s Tea leaves, the prime directive was to forestall any tax increase on any Americans. Therefore, they were determined to ensure that the current rates would be preserved for everyone. They claimed – correctly – that a tax increase on so-called wealthy Americans would impact a large percentage of America’s small business community and consequently inhibit job creation and prolong, if not exacerbate, the unemployment situation in the country. Virtually any price that Obama exacted to secure the continuation of the Bush rates, for however long, was a price worth paying. The liberals’ silly targeted tax credits, extension of unemployment benefits, etc. were small potatoes compared to the critical goal of extending the current tax rates for all.

Both arguments are logical, convincing and easily defended. Moreover, the underlying rationale for either argument emanates from the right side of the political spectrum. Demanding spending cuts and fiscal restraint is as conservative as it gets. But so is the plea for low taxes and job creation, as is the fight against progressive taxation. Thus in some sense, both sides are “right” in their arguments.

So should conservatives be celebrating the deal or ruing the day that it was struck? I believe the answer lies in what conservatives believe to be the current political and economic status of the country, how one measures the degree to which the ongoing progressive onslaught has altered our nation and how radical a course correction one believes is required in order to right the ship of state. Much has been written – from Codevilla’s The Ruling Class to DeMint’s Saving Freedom to Levin’s Liberty and Tyranny – arguing that the political and economic nature of our nation has been radically altered over the last century. According to those arguments, we are no longer a Constitutional republic whose fundamental values are based upon individual liberty, free enterprise, American exceptionalism and Judeo-Christian culture. We are now much closer to a Euro-style, social welfare state in which feasance to the Constitution has been replaced by dependency on big government to satisfy our needs and desires. If one accepts Codevila’s thesis that the Democratic Party is the engine that drives the transformation, abetted by a compliant Republican Party whose leaders aspire to no more than to be admitted to the board rooms of power that administer the social welfare state, then clearly the tax deal represents yet another step down the road to serfdom – even if only a halting and ambiguous baby step. But if one rejects that argument, and instead sees the political landscape comprising a true oscillation between conservative and liberal advances and retreats, not reflecting a persistent, overwhelming advance by progressives, then the tax deal is a small victory for conservatives and should be celebrated.

If the latter are right, we should expect little in the way of fundamental change in the next two plus years. Obama’s natural, hard left inclinations will be held in check to some extent and then who knows what will ensue in 2012? It depends on who is elected president. But the country will continue to bounce back and forth – indulging its equally strong impulses to conserve and liberalize, and while conservatives have the upper hand, they should achieve what they can.

But if Codevilla is right, and we do not initiate a Constitutional revolution in the nation, to wit:

• drastically, broadly and permanently cut the size and scope of government;
• overthrow the unholy alliance between the mainstream media, public sector unions, government bureaucrats, crony capitalists and multiculturalists that have and continue to push America to the left;
• restore a Constitutional republic in which a limited government serves the interests of the people rather than rules them according to elitist ideals;

then we are doomed to complete the progressive trajectory to utopian socialism, second class status as a nation, enforced egalitarian poverty and loss of freedom.

It is not easy to discern under the fog of misinformation disseminated by the Obama administration and its leftist allies in the Congress and the Federal bureaucracy, but these folks seem genuinely puzzled that their Keynesian/socialist policies have not brought the US economy roaring back to life. They said and, more to the point, apparently believed that: the nearly billion dollar stimulus program would provide the perfect jolt to the US job creation machine and cut the employment rate by at least 2%; Obamacare was exactly what the American consumer needed and wanted, and that it would eventually rescue the economy from the ravages of unchecked health care expenditures; the extension and expansion of unemployment benefits and other welfare programs would ease unemployment and cushion the effect that the economic contraction was having on poorer Americans; and finally, their misbegotten mortgage assistance program, cash for clunkers and other artificial, one-time statist interventions in the economy would save it from the severe harm inflicted by the evil policies of the Bush administration – policies which were strangely reminiscent of those of the current administration.

All of these suppositions are patent nonsense. But that this is so is completely beyond the ken of the vastly-experienced businessman whom the American people so foolishly installed in the White House. Obama utterly rejects the policies of Ronald Reagan that rescued the US economy from similar dire circumstances 30 years ago. Instead, he plows ahead with failed Keynesian economic policies and wonders why they don’t herald the economic revitalization that he believes they should. He is clueless as to why American businessmen and the American consumer don’t respond as he expects. It’s the fiscal uncertainty, stupid! The actions of Obama and his minions who, tragically, govern our fair land have created massive uncertainty about what will come next; and it is that uncertainty – as much as the already manifest deleterious effects of Obama’s policies – that is the cause for the continued stagnation in the American economy.

The notion that the uncertainty caused by Obama’s unwise fiscal policies is as damaging as the already perceived ill effects of those policies is not a new idea – although my phrasing of the concept in the title is hopefully novel. I would like to pursue the thought in two ways in this article. First, I will quickly review the nature of the uncertainties and the harmful consequences that follow. Second, I will consider two excellent, recently published books that analyze Obama’s fiscal policies: The Great Money Binge: Spending Our Way to Socialism, by George Melloan (Threshold Editions, 2009) and It’s Not as Bad as You Think: Why Capitalism Trumps Fear and the Economy Will Thrive, by Brian Wesbury (Wiley, 2010). I will discuss how these astute authors’ analyses of the nature of Obamanomics are almost exactly parallel, but how they come to diametrically opposed conclusions as to the consequences for the country and the economy. The point is that if these accomplished experts (both conservative, incidentally) are in complete disagreement about the fallout from Obamanomics, how great indeed must be the uncertainty it is producing in the business community, among investors and consumers and of course in the public at large.

The financial uncertainties that our nation faces are crippling as well as perplexing. But before we recite them, let us list a few of the certainties that have been established beyond doubt in the last 18 months:

·       Obama is a leftist ideologue who wants to transform the US from a society characterized by free markets, limited government, traditional culture and individual liberty into a government-controlled, Euro-style social welfare state.

·       Nationalized health care, cap and trade, massive deficit spending, punitive taxation – especially on the ‘rich,’ extensive government regulation, re-unionization of the American work force and demonization of American business are the main mechanisms he intends to deploy to bring about his radical transformation. He has succeeded in a few of these areas and he continues to press the others.

·       Despite the fact that his agenda was evident for all who cared to look during the 2008 campaign, the American people were blinded by his charisma and apparent pragmatism, by the cover provided to him by the media, and by the populace’s desire to put the nation’s dismal racial legacy to a final rest by elevating a black man to the Presidency. But now a significant portion of the electorate has awoken to the horrendous mistake that was made and is determined to correct said blunder at the earliest opportunity.

These things we know. We see what Obama has done and he is now largely transparent about what he still intends to do. Now what don’t we know?

·       We are unsure of the level of taxation awaiting us. Obama wants to raise income taxes, capital gains taxes, taxes on dividends, FICA earnings limits, estate taxes and all manner of corporate taxes. Will he succeed? To what extent?

·       Do we have inflation waiting just around the corner? perhaps hyperinflation? or will it be deflation? or just stagnation?

·       Will the economy dip back into recession?

·       What surprises await consumers, businessmen and investors in the two multi-thousand page bills that Congress passed in the last four months? What effect will they have on consumer spending or saving, entrepreneurship, the housing industry, the medical profession, Wall Street, Main Street and your street?

·       How much more of Obama’s destructive agenda will be enacted before he stands for re-election? cap and trade? card check? more campaign finance ‘reform’? more education ‘reform’? amnesty for illegal aliens?

·       How deep is the resistance to the threat he poses? Are the Tea Party people representative of not just deep-seated resentment but of a more widespread disappointment at Barack’s plans? Is the Republican Party more RINO than Tea? How will all of this be manifested in the Congressional elections this fall? What effect will that election have on the progress of Obama’s radical agenda? Can any of it be rolled back?

Because of these uncertainties: businesses are loath to invest in new ventures or hire new workers; consumers are reluctant to buy homes; the stock market is subject to wild gyrations; other countries lose faith in the soundness of the dollar; parents worry about their children being able to live as well as the parents do; we remain paralyzed and unable to address the entitlement calamity that is bearing down upon us; public morale is damaged by the enormous debt we are piling up; and our pride in our nation is weakened. Incidentally, this litany doesn’t even touch upon the people’s fear for the country’s security occasioned by Obama’s foreign policy of ‘soft power,’ appeasement, obsequious groveling to tyrants, disarmament and multilateralism.

I doubt there is anything that I have said here with which the two afore-mentioned authors would not agree. In their books, they each come down very hard on Obama along the lines that I have laid out in this piece. The similarities in their analyses of Obamanomics are highlighted by the facts that both books have Forwards written by the same person (Amity Shlaes) and both authors have deep connections to the Wall Street Journal. Yet, Melloan strikes a very pessimistic note, whereas Wesbury remains optimistic.

Melloan: Now, with the crash of 2008, our new president and government appear committed to ignoring the lessons of the past. With multibillion dollar ‘stimulus packages’ becoming the norm, and a multitrillion-dollar national debt that will keep growing so long as present policies are continued, America can look forward to a very grim future indeed.

Wesbury: There is clear evidence that panics and depressions happened with some regularity back in the 1800s and early 1900s, and it is also true that government was small back then, but … Government experimented with two different national banks, often changed the price of gold or silver, issued debt, and regularly interfered with the banking system. … The key is that the United States made it through all of that and has averaged a little more than 3 percent real GDP growth per year for the past … 200 years. This history of free market capitalism is a huge hurdle for anyone who wants to say that it was built on sand to overcome. The United States has created so much wealth and built such a robust system that taking it down is much more difficult than anyone thinks. In the end the economy is built on a rock. … Capitalism has not failed. And it’s not time to give up—on free markets or a better tomorrow. History has shown that every time the economy was thought to be done, worn out, finished, it bounced back. …[It will do so again.] It’s not as bad as you think.

Melloan concedes that America’s economic goose is cooked, while Wesbury attempts to convince the reader that the American economy can take Obama’s best punch and still come back strong. As a stockbroker acquaintance says: ‘The market factored in Social Security, then it factored in Medicare; it will likewise factor in Obamacare.’ But there is no more factor room counters Melloan. Are we hopelessly far down the road to ruin or will America’s unbelievable history of resilience rescue us? I wish I knew which of these two gentlemen was correct. How could they come to such vastly different conclusions based on the same evidence and based on essentially the same evaluation of the evidence? I think the answer can be found in the notion of a tipping point. The idea, which I believe originates with Thomas Sowell, is that there is a point in the transformation of America from a Constitutional Republic to a Euro welfare state beyond which – if we reach it – it will be impossible to reverse course. Actually, in a previous post in this blog, in which I discuss this idea at length, I described three tipping points – one political, another economic and a third cultural. Melloan and Wesbury are concerned exclusively with the second. The answer to the puzzle I posed is that Melloan believes that we have passed the economic tipping point, whereas Wesbury does not. I sure hope that Wesbury is right.

On July 1, 2010 I retired from a major East Coast State University after more than 40 years on the Mathematics faculty. When I was hired in the late 1960s, I enrolled in the State’s Teacher Pension Plan, a defined benefit plan. Over the years I worked very hard in my disparate roles as teacher, researcher and administrator. I climbed the academic ladder and I retired with a reasonably good salary. Ergo, I earned an ample annual stipend to be paid to me during all the years of my retirement.

When I enrolled originally, the State agency that administers the plan sent me glossy brochures assuring me that my contributions – as well as those of the State – would be invested wisely and that these investments would easily generate sufficient revenue in the future to fund my stipend. The accompanying charts and schedules that they sent seemed quite convincing and so I did not doubt the accuracy of the projection. In fact, the plan was typical of others offered by many State governments as well as the Federal Government at the time.

But then the severe inflation of the 1970s struck. The State plan called for annual cost of living adjustments pegged to national indicators without constraint. State legislators decided that the Pension System would not be able to sustain its commitments in that environment and so they made two fundamental changes. First, participants were forced to make a one-time irrevocable choice between substantially increasing contributions in order to keep the same benefit (i.e., no cap on COLAs in retirement) or leaving one’s contribution unchanged in return for a 5% cap on COLAs. I figured that the country would make whatever adjustment was required to reign in inflation (it did: Reagan for Carter) and so I chose the cap. For 30 years I’ve looked like a genius. I used the extra money that I would have paid in increased contributions to fund a 401(k) that did quite nicely over the years – at least until the decade just concluded. Of course, if Obama’s insane fiscal policies cause the severe inflation that most expect, then my genius status will be open to doubt.

The other adjustment the State made (30 years ago) was that it discontinued the plan for all new employees from that point forth. It replaced my plan with one that required smaller contributions by participants but also paid drastically curtailed benefits upon retirement. However, as the years passed, the State became one of the most profligate spenders in the nation – to the point that it now has a multi-billion dollar structural deficit. That puts the State in virtually the same shape as the Federal Government. Its entitlement programs – of which the Pension System is a prime component – have made financial commitments for the future for which there is no reasonable chance that the State will obtain the requisite revenue to pay the expenses.

The State cannot print money like Uncle Sam can. Therefore, it has only two choices: raise taxes and/or cut spending. It has already done the former, with the predictable ill effect on the local economy. There are many ways it can do the latter, but one option not really available to it is to cut my retirement benefit. That would be a clear and blatant violation of the sanctity of the legal agreement that the State made with me more than four decades ago. I don’t think it is going to happen, but I would be lying if I said that I wasn’t worried about the prospect.

Now I have argued, in this blog and elsewhere, that the role of the government in our society has grown far beyond what was intended by our Founders. I believe that the Federal Government’s intervention in and control of the economy and culture of our nation is a grave threat to our freedom and the traditional American way of life. State governments are not nearly as threatening, but they too have gone, in many ways, substantially beyond their assigned role and, like the Federal Government, they interfere with individual liberties more than they protect them. A prime example of both types of governments overstepping their bounds is entitlement programs. Through these programs, governments, both national and local, control our health care and our retirement. But they also increasingly control the education of children, our energy, financial institutions, automobile manufacturers, housing and much more. It was not supposed to be this way. Moreover, I believe it should stop.

And yet, here I am getting a monthly check from both the State and the Feds (my pension and also Social Security). My very sustenance during my retirement arrives via the government, acting in a role that I believe is improper. Ughh!

Am I going to refuse either check? Not on your life! First of all, I earned every penny of the check from the State. I entered into a binding financial deal with the State 40 years ago. I kept my end of the bargain. Now it is time for the State to do likewise. Besides, supposedly the State has been using my contributed funds properly all these years in order to enable it to live up to its obligation to me. I view Social Security somewhat differently. The Feds have been spending every nickel I sent to them lo these 40 years. There was never any pretext otherwise. My financial contributions to the State were an investment. My Social Security contributions were purely taxes paid. Nevertheless, I am not returning my Social Security check either. The Feds would just send it to someone else. Instead, I’ll use it to fund needy people of my own choosing.

It is ironic that I, a staunch opponent of unlimited government, should be ‘dependent’ on two governments to fulfill the legal obligations they took on to bankroll my retirement. Of course, I am not alone. But the situation is more than ironic; it is, as we all know, unsustainable. We need to get the government out of the retirement business. How are we going to do that? Well, since I am part of the problem, it is reasonable that I propose a solution.

In the future, an individual’s relation to Social Security will be as follows. (The choice of the ages is negotiable; the underlying principle is not.)

·       If you are 55 or older, you continue in the current Social Security system.

·       If you are between 40 and 55, you have a choice of remaining or bailing out.

·       If you are under 40, your only choice is to bail.

·       If you bail (either mandatory or optional), you receive from the Feds all the contributions you have made previously to Social Security, augmented by a modest but compounded interest rate. It is now incumbent upon you to provide for your own retirement.

·       If you remain in Social Security, the rules stay as they are (except that the retirement age might increase). Social Security will cease to exist in 50 years. Those few 40 year olds who opt to stay in and survive until 90 will have to be dealt with on an individual basis.

This scheme will still be expensive for the Feds to implement. But it will not be open-ended and just that fact alone will cause a great change in the long-term fiscal health of the nation, as well as provide a start down the road of returning the government to its proper role.