Events have moved so fast in the post-election fallout that the last seven days have seen the political cards completely reshuffled. A new big picture has emerged of the political and economic battleground for the next two years. Facing off in the Main Event are President Barack Obama and incoming House Budget Committee Chairman Paul Ryan (R-WI). For the first time in his life, President Obama is finding himself intellectually overmatched.
The Bush Tax Cuts: The Final Word and Beyond
For how many years have Barack Obama, Nancy Pelosi, and other Democrats been telling America that Bush cut taxes only for the rich? If so, where did all those middle class tax cuts come from that everyone is now talking about extending?
The Republicans are holding the middle class tax cuts hostage? It was the Republicans who enacted the middle class tax cuts, nearly 10 years ago now. That would be $3 trillion in middle class tax cuts over the next 10 years.
Obama and Pelosi are talking as if these were their middle class tax cuts. But they are George Bush's and the Republicans' middle class tax cuts, which they enacted almost 10 years ago. After four years of total domination of Congress, the Democrats have still not extended them, despite all their middle class tax cut blather.
And for three years now, President Obama and Baghdad Bob–style sycophant propagandists from the Center for American Progress have been telling us that it was the Bush tax cuts that caused the financial crisis. As I have explained before, this is Marxian economics, Groucho, not Karl. If the Bush tax cuts caused the financial crisis, then why, pray tell, are we extending them now?
Maybe that is because one of the few Democrat grownups in Washington, senior Obama economics adviser and former Harvard University President Larry Summers told reporters last week that failing to extend the Bush tax rates would cause a double dip recession, which makes Art Laffer's analysis bipartisan. But…wait a minute. Didn't…the Bush tax rates…cause the recession in the first place?
So what happens now? On the one hand, the economy is just bursting to break free of the Obamabonds that have been holding back the recovery, overdue for roughly two years now. A capital strike has $2 trillion sitting in cash on corporate balance sheets and $1 trillion sitting in excess bank reserves. But with the Republicans taking over the House and nullifying Democrat power in the Senate, the class war is over, and all that capital can come out and play now.
On the other hand, all that has happened is that the tax rates that have now been in force for almost 10 years have been continued for 2 more years. The Fed has the economy fully primed for rising inflation and interest rates as the recovery takes hold. The EPA is on a rampage to implement the mother of cap and trade and otherwise shut down the economy. Interior Secretary Salazar is shutting down domestic energy production. Obama's National Labor Relations Board is preparing to shut down small business as it implements card check and forced unionism by decree. Obamacare will kill more and more jobs as it causes health care costs to rise faster and faster, and its employer mandate and tax increases loom closer and closer.
The net net of these countervailing forces is hard to determine. The best guess is that there will be some real recovery over the next year. But the economy is more likely to turn down as we enter into 2012 and the Obama negatives gather force. If inflation does start to accelerate, another recession a year or two later will be inevitable, depending on when the Fed decides the inflation is getting out of control and has to be stopped. Obama's Back to the Future economics will then have succeeded in fully restoring the 1970s.
Shut the Damn Thing Down
Which brings us back to Paul Ryan. The ball is now in his court to produce a dramatic, shock therapy budget, similar to what Chris Christie did in New Jersey and Bob O'Donnell did in Virginia.
The Republicans promised to cut $100 billion in the first year. But the grassroots is already restless over the spending and other deficit increasing ornaments in the tax deal compromise. Ryan and the House Republicans have to understand the political moment.
What they need is a budget that cuts at least the $100 billion promised, plus enough to offset all the tax deal spending increases as well. In fact, Ryan's plan to take every budget line item except Social Security, Medicare, and Medicaid back to 2008 must be the minimum, more than offsetting the tax deal spending and other tax credit garbage. I still prefer going back to 2007. I can't think of any reason why not.
This is the political moment. Ryan's budget must inspire the grassroots. I am not just talking sound economics here. This is sound, must do politics as well. The Washington establishment does not remotely understand today's grassroots sentiment. America would cheer goring outdated oxen like HUD, farm subsidies, the Departments of Energy and Commerce. How about block granting the whole Department of Education back to the states?
If there is backroom resistance from the old bulls, the time has come to out them. Ryan needs to take chances. Propose the right budget. If the Republicans don't follow, then the devil take the hindmost.
The House Republican majority doesn't need the Senate. It can adopt its own budget. Let Harry Reid stew in his simple-minded confusion. The House Republicans can make their budget stick, if they stick to it in Appropriations bills, and refuse to move off. If they don't agree to spend, then it doesn't get spent.
Will Obama force a government shutdown? The Democrat party-controlled media has sold a false story of the Gingrich-Clinton budget battle and shutdown. Gingrich won the substance of that battle. That is where the late 1990s massive budget surpluses came from. Clinton appeared to have won the politics only because Dole was 20 years stale by 1996.
I say shut the whole thing down for two years if we have to, and let's get on with the 2012 presidential election. Put everything on autopilot except national defense. Freeze EPA, by nullifying its budget for two years if necessary. The politics of today is worlds apart even from the 1990s. Ryan and the Republicans would be grassroots heroes if they did this, and Obama and the Democrats would be revealed as budget busting frauds. My guess is if Ryan and the Republicans stuck to their guns, Obama and the Democrats would cave. If not, so be it. Take it to the voters, and ask America if it really wants to be Greece.
Obama's Debt Commission v. The Ryan Roadmap
The one positive turn for President Obama is that his debt Commission raised the issue of tax reform, with sharply lower rates. One idea put on the table is an income tax code with just three rates of 8%, 14% and 23%, a better rate structure even than Reagan's 1986 tax reform with two rates of 15% and 28%. The Debt Commission even raised a possible corporate tax reform with a 26% rate.
I expect President Obama to embrace this intriguing opportunity. That would be good for him, politically and economically, but not good enough, in contrast with the Ryan Roadmap. The Debt Commission tax reform is still a trillion dollar tax increase. It would raise taxes to the highest levels in American history at 21% of GDP, nearly a fifth above the long-run historical average. For all of its talk of spending cuts, the commission actually proposes only $1 in spending reductions for every $2 in tax increases, as reported by the Wall Street Journal on December 3. Under its proposals, the federal budget would still soar to $5 trillion by 2020.
Moreover, all of this fails to take into account realistic estimates of the cost of Obamacare, which will likely soar to two or more times its projected costs, as explained in detail in my Heartland Institute study, The Obamacare Disaster: An Appraisal of the Patient Protection and Affordable Care Act. President Obama's Debt Commission, of course, keeps Obamacare intact, adopting or sharply expanding three entitlement programs.
The Ryan Roadmap includes its own tax reform. After a generous standard deduction of $25,000 for couples and $12,500 for singles, and additional personal exemptions of $3,500 per family member, the tax rate would be 10% for additional income up to $100,000 for couples, $50,000 for singles. A rate of 25% would apply to income after that. Businesses would pay a consumption tax (controversial among conservatives) at a rate of 8.5%, raising as much revenue as today's corporate tax with its internationally uncompetitive 35% rate.
Moreover, CBO scores the Roadmap as permanently balancing the federal budget at the long-run historical average for federal taxes and spending at 18.6% of GDP, which means the budget will be balanced with no tax increase. The Roadmap would also:
• Achieve full, permanent solvency for Social Security, as scored by CBO.
• Achieve full, permanent solvency for Medicare, as scored by CBO.
• Provide a comprehensive health care safety net for the poor and uninsured that would replace Obamacare at tremendous long-term savings.
• Reduce the national debt by 2060 by 82% from where it would be on our current course.
With sharply lower tax rates, federal spending, and national debt, CBO projects that under the policies of the Roadmap, per capita GDP by 2058 would be nearly 70% higher than under current law. That is an enormous prosperity bonus for the American people.
Republicans should embrace the Roadmap and frame the debate this way for the next year, for it would be a huge winner politically as compared to the President's Debt Commission. Those scared to do so are actually just too intellectually lazy to make the effort to understand and communicate the issues.
By 2012, whoever emerges from the Republican presidential primaries will reframe the issues with a new agenda. Through more aggressively pursuing emerging ideas such as block granting welfare back to the states, proposing even broader long-term opportunities for working people, and rounding off some of the rougher edges of the Roadmap, that new agenda can offer even greater political appeal.
Bye, Bye Obamacare
On Monday, Federal Judge Henry Hudson granted America an early Christmas present by declaring the individual mandate in Obamacare unconstitutional. The individual mandate is the provision that all individuals without employer-provided coverage must purchase health insurance with all of the benefits and provisions as specified by the federal government. A new dynamic has now been set in motion on this issue as well.
Hudson ruled that Congress does not have authority to impose such a mandate under the Commerce Clause, saying, "Neither the Supreme Court nor any federal circuit court of appeals has extended Commerce Clause powers to compel an individual to involuntarily enter the stream of commerce by purchasing a commodity in the private market."
Hudson also rejected the attempt of President Obama's lawyers to argue that the individual mandate was constitutional as an exercise of Congress's power to tax. In a famous exchange on national television with George Stephanopoulos in 2009, President Obama vigorously denied that the individual mandate was in any sense a tax.
Hudson relied on this and the statement in the legislation itself that its authority arises from the Commerce Clause to base his decision on "the unequivocal denials by the Executive and Legislative branches that the [individual mandate] was a tax." As a legal matter, the individual mandate is transparently a regulation, not a tax. Judge Roger Vinson hearing a suit in Florida by 20 states challenging the constitutionality of Obamacare has already dismissed that claim on the same grounds.
However, even though the legislation does not include a severability clause, which traditionally provides that the legislation would remain in force if any of its provisions are found invalid, Hudson nevertheless declined to strike down the entire act.
The ruling is an enormous victory for Virginia Attorney General Ken Cuccinelli, who is building a tidal wave of momentum for political graduation to Governor or Senator soon. I filed a brief in this case on behalf of the American Civil Rights Union (ACRU), supporting Cuccinelli and Virginia.
One of the unique arguments of that brief was that the uniform discussion of the lawyers in the case of the "interstate market for health insurance" made no sense, because there is no interstate market in health insurance, particularly in regard to the individual insurance that the individual mandate compels citizens to buy. All such insurance is sold only intrastate, under federal and state law. One of the central arguments of the opponents of Obamacare was that allowing health insurance to be sold interstate was a superior reform that would hold down costs through increased competition.
Having filed a brief for the ACRU in the Florida case as well, I predict that with this precedent, Judge Vinson in Florida will also rule the individual mandate unconstitutional, on the same grounds. And I predict that the Supreme Court will as well, going on to strike down the entire Act because as even the government argued so persuasively in its briefs, the legislation is unworkable without the individual mandate.
If Judges Hudson and Vinson see the issue this way, then the handwriting is on the wall that Justices Scalia, Thomas, Roberts. and Alito will as well. That leaves Justice Kennedy with the decisive vote, as the liberals on the court will typically abandon all serious legal analysis and go with the politics for Obama.
What will be crucial in winning Kennedy's vote in my view is another unique argument made in the ACRU's briefs. Congress has other alternatives to achieve all of the social goals of Obamacare that would be constitutional. Kennedy would be loath to rule, I believe, that the Constitution just doesn't allow the social goals of Obamacare to be achieved at all, leaving some without essential health care.
Indeed, those alternatives would achieve all of those goals at far less cost. They would involve creating a true health care safety net for the poor and the sick. President Obama and the Democrats just didn't want to pursue those alternatives because they don't involve the government takeover of health care.
If these predictions come to pass, in two years the only legacy President Obama will leave behind is a skyscraper of wasted federal spending, a mountain of new federal debt, and a nuclear Iran.
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