Category: Economics

Bush Seeks Legislative Slim-Fast

President Bush is asking for extended recission authority – the right to force Congress to make an up-or-down vote on a porkbarrel project in a bill. In 1996 the Republican Congress passed the line-item veto that would allow the President to directly excise unnecessary riders to a bill. The Supreme Court upheld a Circuit Court ruling striking down the line-item veto in 1998 in the case of Clinton v. City of New York (985 F. Supp. 168). The Court felt that the line-item veto allowed the President to make de facto amendments to acts of the legislature – thus violating the principle of separation of powers.

This bill is designed to make an end-run around Clinton by not allowing the President to do directly interfere in the affairs of the Legislative Branch. However, the Courts may find that this bill also violates separation of powers – the President is still interfering with the text of a bill rather than performing the function of the excutive to either veto or pass a bill. It would appear that this new recission authority exists in a legal grey area at best – and could very well be unconstitutional as demanded.

There’s also the political concern over this bill. Imagine a Democratic President and a Democratic Congress working together to ensure that spending bills that benefitted Republican members of Congress were forced onto the floor while Democratic spending was not made to endure an up-or-down vote. Such a scenario is hardly unthinkable in today’s hyper-partisan climate.

The President’s heart is in the right place, but the fact is that the power of the purse is Constitutionally given to the legislative branch, and if President Bush wants to control spending then he must gather the political will to veto legislation that is saddled with pork. The President has not once used his veto powers, even when signing acts into law like the pork-stuffed Farm Bill and Highway Bills. It’s hardly surprising that many are looking at President Bush’s newfound sense of fiscal rectitude with suspicion – Bush has never been a budget hawk and it’s more than a little late for him to start now.

Congress needs to reform itself. It should pass rules that prevent bills from becoming mere vehicles for pork. They have plenty of options – a return to the PAYGO rules of the Budget Enforcement Act, single-issue rules for legislation, controls on the number of riders, mandating that all legislation be read on the floor before bringing in a vote. Controlling spending is not a function of the Executive aside from suggesting budgets and vetoing legislation. Bush can’t let Congress pass the buck on spending to him, and while this recission authority is tempting, it’s not the right solution towards tipping over the pork barrel.

Might As Well Face It, You’re Addicted To Crude

(With apologies to Robert Palmer.)

President Bush has stated that the United States is “addicted to oil.” Which isn’t all that inaccurate a statement, we do have a necessity for a substance sold by a bunch of rather shady characters. However, one could also say we have an addiction to air as well – it’s necessary for our healthy functioning.

The biggest problem with alternative fuels is physics. Gasoline carries a lot of energy, or as physicists say, it has a high energy density. (Around 45MJ/kg for the people who actually care – all none of you.) In comparison, alternate fuels like ethanol has a much lower energy density (about 25MJ/kg).

Now, hydrogen has a great energy density (around 120MJ/kg), but it takes much more energy to get that hydrogen than it does to get other fuels. In fact, it takes considerably more energy to create hydrogen than we get back from burning it. Even a very efficient hydrogen fuel cell runs at only 25% efficiency when the creation, storage, and transportation of the hydrogen is taken into account. Gasoline still remains the king of energy storage needs.

Bob Zubrin, who’s really is a rocket scientist believes that biofuels are the future – taking agricultural waste products and turning them into liquid fuels. Already this is being done with 10% Ethanol blends and even E85 fuels. The problem with these fuels is the old energy density problem. You’re only getting an efficiency of 1-2% from these fuels, and while the energy used to produce them is relatively cheap (as much of it comes from the sun), E85 fuel is corrosive, and many cars on the road today don’t accept ethanol fuels. I know that I won’t touch even 10% ethanol fuel because it kills my gas mileage, degrades my engine performance, and I end up burning more fuel. If a 10% ethanol blend causes a drop in fuel efficiency of 11%, then you’re using more gasoline to produce the same amount of work.

Not only that, but biodiesel fuels produce unacceptably high levels of particulate matter – smog, in essence. The 2006 VW Jetta Diesel may get 40mpg on biodiesel fuels, but has one of the worst emissions ratings of any car. The only way to reduce particular emissions from biodiesel is to install complex filtering systems that rob those engines of power.

Electric cars don’t help either – they just shift the pollution from vehicles to power plants. Thanks to decades of overregulation, we don’t have the power generation capacity to meet current demand, no less the demands of a million new electric cars. Most of America’s electricity still comes from coal, and even “clean coal” plants belch out tons of particulate matter and other pollutants. Furthermore, coal power produces more radiation than do nuclear power plants – and that radiation goes right into the atmosphere rather than being contained.

Obviously, we can’t stay on fossil fuels forever, but we don’t have any alternatives that have the same economic benefits, and we can’t change the laws of physics. What we can do is realize that if we’re going to have a biofuel economy, we’re only solving half the problem – electrical generation still produces pollutants, and we’ve all seen how dangerous coal mining has become. The alternative to the kind of mining that killed the miners in West Virginia is strip mining, and that isn’t something most people particularly care to allow. Again, we’re faced with either subjecting people to a dangerous environment to gather coal resources or “despoiling” the environment through strip mining – and then living with the pollutants produced by coal.

Looking realistically at the economics and the physics involves, our best solution remains a multi-pronged approach. The Chinese are working towards producing 300 gigawatts of nuclear power by 2020. The entire world output is 350 gigawatts at the present time – China intends to produce a truly massive amount of electricity using safe and efficient pebble-bed reactors. If you have 300 gigawatts of efficient energy to play around with, you can start to afford to let some of it go to “waste” in inefficient processes like hydrogen generation.

However, the biggest roadblocks towards energy independence are bad policies. Regulation has made nuclear power generation economically impossible. The NIMBY effect and the irrational fear of anything “nuclear” by the American public make nuclear power a virtual non-starter. The Bush Administration has quietly been making things easier, but government policies still put this efficient and safe technology far out of reach.

Biofuels are mainly produced from corn, which is tremendously inefficient and done mainly as a way of buying off rural voters with government subsidies. While ethanol is tremendously popular here in America’s heartland, it’s because it’s a gold mine for farmers rather than its real economic value. While it’s much better to be sending money to Billy Farmer in South Dakota than Ahmad al-Wahhabi in Saudi Arabia, the subsidies on ethanol production distort the market. The price of ethanol is set artificially low, which helps farmers and makes ethanol blends more attractive, but end up costing more than they should and stifling innovation. Take away the economic incentives to make ethanol cheaper and we end up with the same inefficient processes rather than finding the next breakthrough that could make ethanol fuels truly cost competitive.

Markets are fantastically good at finding and utilizing efficiencies when resources get scarce. Governments are not. As valuable as government research can be, the best way of jump-staring America’s path into energy independence is for government to get the hell out of the way. We have options for energy independence, from manufacturing oil through polymerizing turkey guts to advanced pebble-bed nuclear reactors. The problem for all these different forms of energy is that regulatory pressures make it damn near impossible for anyone other than huge multinationals to develop alternate energy sources. Smaller companies don’t have the resources to navigate through the minefields of regulation on the local, state, and federal level, meaning that they end up being forced to close down or sell out.

Breaking our “addiction” to oil won’t be easy. It requires us to think creatively, try daring new initiatives, and be willing to fail. Neither of those three are qualities found in big business or government. They are all qualities found in America’s entrepreneurial spirit. The next great breakthrough in energy might be found in someone’s garage, but if the regulatory climate doesn’t let that inventor bring his product to market we’ll never know. Our addiction to oil is directly tied to our government’s addiction to onerous regulations, and until we break the latter, we’ll have a much more difficult time breaking the former.

The Marriage Gap

City Journal has a fascinating piece on why the decline in marriage has led to increased social stratification:

It’s common sense, backed up by plenty of research, that you’ll have a better chance of fully “developing” your children—that is, of fulfilling The Mission—if you have a husband around. Children of single mothers have lower grades and educational attainment than kids who grow up with married parents, even after controlling for race, family background, and IQ. Children of divorce are also less likely to graduate and attend college, and when they do go for a B.A., they tend to go to less elite schools. Cornell professor Jennifer Gerner was baffled some years ago when she noticed that only about 10 percent of her students came from divorced families. She and her colleague Dean Lillard examined the records of students at the nation’s top 50 schools and, much to their surprise, found a similar pattern. Children who did not grow up with their two biological parents, they concluded when they published their findings, were only half as likely to go to a selective college. As adults, they also earned less and had lower occupational status.

To repeat the question: Why do educated women marry before they have children? Because, like high-status women since status began, they are preparing their offspring to carry on their way of life. Marriage radically increases their chances of doing that.

This all points to a deeply worrying conclusion: the Marriage Gap—and the inequality to which it is tied—is self-perpetuating. A low-income single mother, unprepared to carry out The Mission, is more likely to raise children who will become low-income single parents, who will pass that legacy on to their children, and so on down the line. Married parents are more likely to be visiting their married children and their grandchildren in their comfortable suburban homes, and those married children will in turn be sending their offspring off to good colleges, superior jobs, and wedding parties. Instead of an opportunity-rich country for all, the Marriage Gap threatens us with a rigid caste society.

The problem with the modern liberal (again, as opposed to classical liberal) view of inequality is that they treat it as an economic problem when it’s more of a social problem. The Marriage Gap is one of the single largest drivers of poverty in the United States today. The problem is that no government program can fix the problem of the degenerated state of marriage in America. You can’t cut someone a government check and make them get married. The typical liberal policy solutions just don’t have much efficacy here.

Which isn’t to say government can do nothing – the 1996 welfare reform project worked brilliantly because it helped push people into patterns of behavior more amendable to staying out of poverty. Efforts to promote and encourage stronger marriages can help reduce the rate of poverty and inequality to a certain degree.

I once heard someone refer to marriage as “conforming to that particular societal norm” – which in some ways isn’t all that inaccurate. The problem is that the societal norm of marriage has been systematically debased since the cultural upheaval of the 1960s. “That particular societal norm” isn’t some arbitrary construct; the concept of the nuclear family exists precisely because that’s the system that leads to the healthiest society. A child who grows up in a stable two-parent family has a much better chance of success throughout life than a child in a single-parent family.

In many ways, despite the image of the rich as being like The O.C. or Paris Hilton, the vast majority of American millionaires live utterly pedestrian lives. They live under a value system in which getting pregnant at 19, not going to college, and being irresponsible in life choices is absolutely unthinkable. There is a direct correlation between traditional family values and social status in American society today.

This is why social programs don’t work. Welfare doesn’t change attitudes. It doesn’t strengthen marriage as an institution. It doesn’t encourage people to have the right attitude about life – an attitude that many in the farthest elite circles of the American intelligentsia would find shockingly retrograde. The idea of actually getting married before having kids and staying married seems altogether too June Cleaver-esque for many.

But at the same time, our societal attitudes towards marriage are leading us to a society in which those who don’t follow the societal norms that kept American society coherent are stuck in the same rut of poverty and poor life choices while those who do excel. Ultimately, what makes the debate about poverty in equality in America so frustrating is that it never touches on the real reasons why those factors exist. If just throwing money at the problem was at all effective, LBJ’s “War on Poverty” would have been a smashing success – instead, poverty won.

So, if we truly wish to reduce inequality in America, we’d encourage young women not to sleep with every schlub they find, and encourage young men that going through life stoned, drunk, and stupid is not a recipe for success. Instead American society constantly encourages values which lead to more poverty – sexual promiscuity, anti-intellectualism, and a massive sense of entitlement. So we teach young women to be stupid, spoiled whores and young men to be vapid, drugged-up, and to treat women like “hos” – and we wonder why we’re creating an impoverished underclass.

Of course, this flies in the face of modern liberal orthodoxy. The idea that – gasp! – traditional values are key to fighting poverty is no doubt a difficult pill for the left to swallow. Yet the evidence indicates that marriage rates and poverty are directly correlated. When people practice “traditional values” negative societal problems like crime decrease. Increasing welfare won’t lift people out of poverty – but fostering a culture that upholds and strengthens marriage will.

While it’s easy to paint social conservatives as a bunch of moralizing busybodies – and some of them are – that doesn’t mean that traditional values are worthless. And while feminists talk about marriage being some tool of patriarchal oppression, it’s women who have been hurt by the inevitable blowback from the sexual revolution as they’re the ones left to pick up the pieces and raise the children. Indeed, psychologists and economists both agree that married people tend to be significantly happier than unmarried people – and happiness strongly correlates with success. Further correlating with that is the fact that despite the claims that sexual liberation leads to greater happiness, an increasingly sexualized culture is devaluing not only marriage, but even sex.

The institution of marriage is instrumental to strong families, and strong families are instrumental to a strong society. So much of the breakdown in American society traces its origins to the breakdown in the family structure. And while it’s politically expedient for many to try to blame poverty on economics and the stilted appeals to “oppression”, “patriarchy”, and “racism” the reality is that those dreaded moral busybodies many know what’s best for society after all.

UPDATE: The New York Post notes that couples who stay married accumulate twice as much wealth as those who do not.

Liberalism And Unintended Consequences

Arnold Kling has the first part in a series explaining economics to liberals in TCS Daily dealing with the Maryland law demanding that Wal-Mart spend 8% of its payroll on healthcare benefits for its employees. On the surface, this seems like a good idea. Wal-Mart is the nation’s biggest retailer, and the company everyone loves to hate. Surely this is a win for the little guys, right?

But Kling rightly points out that the real world isn’t nearly that simple. Maryland’s law will likely cause people to lose their jobs or see their paychecks suddenly be much smaller. As simple as it is to see the world as a big semi-Marxist reality play in which the phantom “plutocrats” prey upon the oppressed bourgeoisie caught in their cash nexis, that view bears almost no resemblance to the real world. Especially for minorities, Wal-Mart is a godsend – not only do they provide low-cost goods to impoverished communities, but they provide jobs that wouldn’t be there elsewise. Yet Wal-Mart has been turned from a low-rent retail giant into the very image of evil itself in the minds of some.

Kling gets down to the basics:

Liberals see the market as an arena in which evil corporations inflict their greed on innocent victims. I wish you would see that motives matter less than consequences. I wish you could see that greed is at work when laws are passed that regulate markets, because regulations always produce winners and losers. I wish you could see that those winners and losers are often not who you think they are. I wish you could see that competitive behavior and free choice are forces that operate in the market as a check against greed. Finally, I wish you could see that greed is most difficult to restrain when it is exercised through the medium of government.

That is the fundamental problem with what is called “liberal” economics these days. (Except they’re not liberal at all – they’ve more in common with Marx than Locke or Mill.) Government is no less greedy, no less rapacious, no less heartless, and no less cutthroat than Wal-Mart. The difference is that Wal-Mart can’t shoot you for refusing to shop there.

The liberal economic worldview is a exceedingly simplistic one, a morality tale in which big mean corporations constantly attack the little guy, with government acting as a knight in shining armor. The problem is that governments is the single least efficient or accountable agency in society – as Washington (more than likely apocryphically) called it “a dangerous servant and a fearful master.” Modern Liberalism presupposes a nobility to government that is exceptionally naive.

While classical liberals are often accused of being naive about the power of the market, classical liberals have something that modern “liberals” don’t – empirical evidence. Markets work, government doesn’t. Markets don’t create heaven on Earth, they simply do better than any other alternative. The last few centuries of history have seen socialist experiments sputter along (modern Western Europe) or fail in spectacularly bloody fashion (see Cuba, the Soviet Union, China, etc…). At this point, the only arguments that try to decouple economic performance and quality of life from economic freedom are arguments that willingly distort or ignore the facts.

It’s easy to be a modern liberal these days – it’s easy to hate Wal-Mart, demand a “living wage”, demand affordable healthcare for all, etc. The problem is it’s also easy to demand that you get your own private island, LearJet, and incredibly flexible supermodel. Both try to ignore the reality that we have limited resources to allocate and human wants are effectively limitless. You can’t snap your fingers and demand that Wal-Mart pay 8% of payroll to healthcare without taking that 8% out of the paychecks of Wal-Mart’s workers or raising prices for everyone. Life just isn’t that simple.

And that’s why I’m a classical, rather than a modern liberal – because the values of classical liberalism have worked in the past and continue to work in the future. For every government action, there are a host of negative unintended consequences – and the more utopian the idea, the worse those consequences will be. Maryland’s efforts to force Wal-Mart into their particular idea of what the market should be is bound to fail – although sadly for many, it’s the intention of an action rather than the consequences that count.

The China Paradox

The International Herald-Tribune has an interesting piece on the growing unrest between rural and urban China. China’s economy grew at an incredible rate of nearly 10% last year, but that kind of rapid industrialization does not come easy. The Chinese economy may be growing, but that growth is not sustainable over the long term.

In the 1980s, US pundits worried that the “Japan, Inc.” model of capitalism would quickly overpass the United States. Japanese technology and industry were churning out consumer goods by the masses and Japanese investors were heavily investing in depecated American assets and buying large chunks of our national debt. Throughout the 1980s and early 1990s it was commonly believed that the Japanese economy would rapidly overtake the US economy. In 1992 none other than Michael Chricton published a book called Rising Sun that breathlessly warned in an afterward that:

Sooner or later, the United States must come to grips with the fact that Japan has become the leading industrial nation in the world. The Japanese have the longest lifespan. They have the highest employment, the highest literacy, the smallest gap between rich and poor. Their manufacturing products have the highest quality…

By 1998, the Japanese economy was approaching collapse. The Japanese banking system was nearing collapse, unemployment skyrocketed, public faith in the government fell. It has not been until recent years under the more reformist Junichiro Koizumi that the Japanese economy has once again gotten on its feet.

So what happened to Japan and could the same happen to China?

The Cato Institute’s Brink Lindsay takes a look at some of the factors behind the Japanese decline of the 1990s. The Japanese model of a heavily-subsidized industrialization, its rampant cronyism, and the fundamental inflexibility of the keiretsu model of mega-corporations all proved to be unsustainable over the long term. The fundamental error of the Japanese economy was assuming that a mixture of heavy state control could mix with crony capitalism to create a long-lasting basis for economic development. That mistake very nearly sent Japan into a major depression.

China is following much the same model. China’s growth is massive, but it is not sustainable. China is assuming that a strongly centralized system with inadequate protections under the rule of law will somehow sweep away the bedrock problems of living in a system that still stifles the creativity of its people. China is hoping that they can build an economy backwards – a sustainable capitalist economy is not built from the top down but from the bottom up. It requires the people to have a system that protects their life, liberty, and property. The Chinese state does neither. There is little to no real political freedom in China, and the basis for China’s economic growth is not sustainable over the long term.

While politicians are increasingly seeing China as a scapegoat or warning about China’s imiment economic superiority, the reality of the situation is much different. The US should do what it can to encourage China to liberalize its economy and provide more political and economic freedoms for its people. If China falls into recession it could have disastrous consequences for East Asia and the world.

All the fearmongering about China is eerily similar to the fearmongering over Japan – with the results quite likely to be similar. China’s economic growth may be impressive today, but the chances of China being able to integrate hundreds of millions of peasants into their economy and maintain their rates of growth are slim to none without significant economic and political reform. China’s authoritarian government, lack of human rights, and cronyism are all going to catch up to them sooner or later. The big question is how hard that fall will be and how it will effect the rest of the world.

How To Destroy An Economy

Angela Merkel was supposed to bring a breath of fresh free market air into the increasingly statist and creaking German economy. Sadly, she’s well on her way to making things far worse:

The new German Government is launching one of the boldest experiments ever undertaken in the history of economics — or rather anti-economics. Germany in the past three years has been the world’s most depressed economy, with the weakest growth in economic activity and consumption. The coalition partners — representing, as they do, the opposite ends of the political spectrum — found it hard to find common ground on most issues, but on one point they could emphatically and enthusiastically agree: the way to stimulate an economy suffering from mass unemployment and stagnant consumption is to increase tax.

Germany’s plan to cure its self-confessed economic failure by doing exactly the opposite to what modern economics would suggest is certainly a bold and novel idea. Jim O’Neill, the chief international economist of Goldman Sachs, remarked on television last week that German politicians are acting as if they had never seen an economics textbook, much less understood one.

Germany has been called a “tax hell” – and for good reason. Germany has some of the most punitive tax policies in the EU. Even worse, the German labor market is horrendously ossified, meaning that unemployment has been in the double digits for some time. Even if the economy were to pick up, German firms wouldn’t engage in a rounds of hiring for fear that the next contraction would leave them with payrolls they couldn’t afford – so they simply don’t hire new workers. Germany is caught in an economic catch-22 – their economy can’t recover without jobs, but employers aren’t willing to hire with all the economic uncertainty.

Merkel’s new “grand coalition” has taken the least popular approaches of both the Christian Democrats and the Social Democrats. They’re hiking the top tax rates from 42% to 45%, while simultaneously increasing consumption taxes and eliminating deductions. In essence, everyone will see a higher tax bill as Germany tries to tax its way out of its massive structural debts. That plan is one that is absolutely doomed to failure:

Germany’s booming industrial exports have made it the world’s largest exporter but the sullen refusal of its own consumers to open their wallets has thwarted hopes across the continent of a revival in Europe’s dominant economy.

The German Institute of Labour and Economics said the coalition negotiators had displayed “economic illiteracy” by ignoring the importance of consumer spending and deciding to rein in the government’s budget deficit at the risk of tipping the economy into recession.

As Anatole Kaletsky notes in the Times piece, this is exactly the kind of strategy that brought the Japanese economy into recession:

Experience suggests success in stimulating the economy through higher taxes is very unlikely, but not entirely impossible. Let me begin with the bad news. The closest analogy for what Germany is now attempting is the rise in consumption-tax imposed by the Hashimoto Government on Japan in 1997. The Japanese economy had already been depressed for five years before this tax increase (just as the German economy has been depressed since 2001), but still Japanese consumption grew by an average of 2.3 per cent annually from 1991 to 1996. In the year following the tax increase, Japanese consumption collapsed by 3 per cent and consumption growth in the following five-year period averaged a meagre 0.2 per cent.

This collapse in Japanese consumption from 1997 onwards triggered the Asian financial crisis and the huge economic dislocations that went with it. In other words, the 1997 tax increase was arguably the most disastrous economic measure imposed by any major government since the Smoot-Hawley tariff of 1931.

The German tax hikes have the potential to be much worse. If the ECB would adjust interest rates downwards, it would give Germany a chance to gain some valuable liquidity that would at least soften their economic crash. However, the ECB has signaled that they may raise interest rates in the near future.

Merkel’s disastrous economic plan is a recipe for 1970s-style stagflation which could easily spread economic chaos throughout the Eurozone and beyond. A financial crash like the Asian flu of 1997 in Europe would have an even more devastating effect on the world’s markets.

Fiscal Conservatism Making A Comeback?

Fiscal conservatives haven’t had much to crow about from the Bush Administration. Despite Bush’s policies of lowering the tax burden across the board, in terms of fiscal policy he’s governed like a Democrat. Under Bush we’ve seen a massive increase in wasteful farm subsidies, we’ve seen the creation of a new and fiscally damaging Medicare prescription drug benefit, and the energy and transportation bills have been stuffed with enough pork that copies of it would be banned in British offices less it offend Muslims.

In short, Bush may be good on taxes, but lower tax rates aren’t fully effective unless they’re accompanied by reductions in spending, and Bush has not only failed to deal with runaway entitlement spending and pork, but he’s expanded both.

It’s time that the GOP rank and file said “enough is enough.”

And thankfully, they are.

The Coburn Amendment would take money to build a wasteful multimillion-dollar bridge in Alaska where it is entirely unneeded and use it to rebuild a bridge battered by Hurricane Katrina. Mike Krempasky calls it “a hill to die for” and that statement is dead-on for fiscal conservatives. It may not mean much in the grander context of the national budget, but it’s a powerful sign that conservatives are no longer going to sit around and let Congress spend willy-nilly while the US budget deficit skyrockets.

It’s about time. Non-defense discretionary spending under the Bush Administration has skyrocketed at unprecedented rates. Spending on education at the federal level under Bush has outstripped even Clinton-era spending increases, despite the fact that Bush campaigned as a proponent of local control and school choice. The Medicare prescription drug benefit was a clear political move designed to win over senior voters – and it wouldn’t seem as though it achieved that goal. The number of seniors who have an actual need for such a benefit was and is small enough to have been dealt with by existing programs, both public and private. Instead of having seniors utilize those resources, the Bush Administration created a monstrosity that will add nearly $700 billion in unfunded liabilities to the already failing Medicare system.

It’s time for fiscal conservatives to make themselves heard. The Bush Administration has ignored the most basic principles of fiscal conservatism for too long, and in a time of war and natural disasters, it is simply intolerable that American taxpayers are being asked to foot the bill for bridges to nowhere and other pork projects. The most basic tenet of the modern Republican party since the days of Reagan has been that government is not the solution to every problem. In fact, more often than not, it’s the cause of many of them.

Expanding government by necessity limits individual autonomy, and tax cuts are only half of the equation. Government spending must be restrained. We don’t elect Republicans so that they can govern like Democrats and continue to expand the size and scope of the federal government at alarming rates. Fiscal conservatism can and should make a comeback, but the only way to do that is to show that fiscal irresponsibility is a losing proposition. A massive groundswell of grass-roots support for the Coburn Amendment is an ideal way of telling Congress that it is time to put America’s fiscal house in order.

McCain Stands Against Pork

While John McCain may give conservatives paroxysms from time to time, he also has a well-earned reputation for being one of the strongest fiscal hawks in the Senate. He’s even gone as far as calling on Congress to repeal the Medicare prescription drug bill to pay for hurricane reconstruction.

When McCain is right, he’s right, and when McCain is wrong, he’s wrong. In this particular instance, Sen. McCain is absolutely right. The Medicare bill is a massive expansion of an already over-stretched entitlement system that puts a massive drain on the Treasury. Canceling that one bill alone would more than pay for reconstruction, as well as help us relieve some of the massive debt we’re accumulating due to the fiscal irresponsibility of Congress and the President.

What McCain is proposing is politically risky – in fact, it’s extremely risky. Repealing entitlement spending is not the sort of thing that most Republicans care to do less they be crucified by the press for being heartless bastards who want to make Grandma eat dog food. However, McCain is one of the few politicians who can have a shot at pulling that off. He has a reputation as a straight shooter, and if he says we need to tighten our belts, people may listen – whereas if Bill Frist would have the fortitude to do the same the media would eat him alive.

In any event, McCain is right. We must control the massive growth of non-defense discretionary and entitlement spending in this country. And so far, McCain is one of the few members of Congress who has the cojones to stand up and say that we may have to make some serious cuts to spending in order to put our fiscal house in order.

McCain is right, and the rest of the Congressional Republicans should be standing with him. It is a time to end business as usual in Congress. We face war, natural disasters, and shifting demographics. Now is the time to get serious about fiscal discipline, before our problems grow to the point where they drag on economic growth.

It’s time for the Republican Party to once again become the party of fiscal discipline – a mantle we have sadly abdicated in recent years. If John McCain will lead this party towards that end, then the rest of the party would do well to follow in his footsteps.

A Time For Sacrifice

John Fund has an excellent piece asking why the Administration and Congress aren’t cutting non-defense discretionary spending. We’re in a war and dealing with the aftermath of a major national disaster that effects millions. And what has Congress done in recent months?

Neither the White House nor Congress appears to be in any mood, for example, to revisit the highway bill’s 6,373 “earmarks,” or individual projects for members, worth $24.2 billion. Alaska’s Rep. Don Young, chairman of the House Transportation Committee, has bragged that the bill is “stuffed like a turkey” with goodies for his state. It includes $721 million for Alaska, including a $2.2 million “bridge to nowhere” connecting the town of Ketchikan (population 8,900) to an airport on Gravina Island (population 50). Another bridge, in Anchorage, has a $200 million price tag and is considered such a marginal project that even the Anchorage Chamber of Commerce opposes it.

Non-defense spending has skyrocketed in recent years, growing by leaps and bounds during a time of war. The appitite for pork in Congress continues unabated, with such wasteful programs as the Medicare bill, the farm bill, and the transportation bill costing this nation billions in wasteful pork-barrel projects. These projects would be a waste in peacetime – but in a time of war they’re absolutely unconscionable. Fund notes that FDR was perfectly willing to slash spending during the Second World War – and while we’re not engaged in a conflict of that order, there’s no reason why someone in Washington can’t start demanding fiscal discipline.

It’s a sad reality of American politics that there isn’t a single party willing to hold the line on spending. The Democrats would tax and spend, which would harm the economy while expanding the deficit, and while the Republicans have the right idea on taxes, they still don’t have a clue about holding down the continual expansion of government. If anything, political power has weakened the GOP’s resolve in controlling the size and scope of government. The Medicare bill was nothing more than a massive handout – and did it make the AARP any more likely to accept the critical efforts at reforming Social Security? Certainly not.

The Bush Administration has been excellent on terror, good on taxes, but pitiful when it comes to limiting government. In a time of war, spending $2.2 million to build a bridge to nowhere is absolutely unacceptable. Dumping billions into subsidies is unacceptable. Inflating the size of government at a record pace is unacceptable.

With the effects of Hurricane Katrina requiring a massive rebuilding effort, it’s time for Bush to draw a line in the sand. No more pork. No more subsidies. No more handouts to industry. Sadly, while Bush’s determination in the war on terror is resolute, his determination to stem the tide of government encroachment is as lily-livered as they come. The American people are perfectly willing to sacrifice their time and their money to help those in need along the Gulf Coast. Why can’t government be willing to sacrifice its addiction to pork barrel spending?

Why That Lincoln Navigator Is Saving The Planet

As the horrible devastation of Hurricane Katrina pushes the price of gasoline to ever-higher levels, the Bush Administration has stated that they intend to raise federal fuel efficiency (CAFE) standards even higher to promote greater energy efficiency and lower oil consumption.

The problem with this is that it simply won’t work. There’s a dirty little economic secret that few know about but has a profound effect on the world economy: Increasing efficiency doesn’t decrease consumption.

James Glassman at Tech Central Station provides an explanation for this phenomenon:

“The pursuit of efficiency,” write Peter Huber and Mark Mills in “The Bottomless Well,” their superb book on the future of energy, “has been the one completely consistent and bipartisan cornerstone of national energy policy since 1970.”

 

We’re told that higher mpg can even defeat our enemies. In a recent article that linked oil dependency with terrorism, Fareed Zakaria, editor of Newsweek International, concluded, “It’s true that there is no silver bullet that will entirely solve America’s energy problem, but there is one that goes a long way: more fuel-efficient cars. If American cars averaged 40 miles per gallon, we would soon reduce consumption by 2 million to 3 million barrels of oil a day.”

 

Increases in energy efficiency have been the rule in the United States for a century — and especially in the past 30 years. But, as Huber and Mills write, “Efficiency doesn’t lower demand, it raises it…. Efficiency has come, and demand has risen apace.”

Economists wouldn’t find that concept as strange as it may seem. Efficiency tends to lower costs – and lower costs tends to make people use more of something. Indeed, the numbers bear out this theory – over the past 30 years energy usage has increased at the same time energy efficiency has increased. Modern cars get significantly better gas milage than the gas-guzzling monstrosities of the 1970s – but the usage of gas continues to increase. Huber and Mills’ book is a fascinating look into the economics of energy, and why conventional energy policy tends to make things much, much worse.

For instance, take raising the CAFE standards. More energy efficient vehicles means less pollution and less gasoline usage, right? The problem is that increasing fuel efficiency requires technical tradeoffs in design. Instead of using stronger steel-frame construction, a manufacturer might use lighter aluminum that’s more likely to crumple in an impact. The difference in weight and fuel efficiency comes at the expense of passenger safety. Engineers understand these compromises, but politicians do not.

The economics also don’t make much sense once one gets beyond the surface of the issue. Newer cars are more fuel efficient than older cars. However, more fuel efficient cars can be more expensive, and the costs of increased fuel efficiency end up getting reflected in the sticker price. If someone has to keep running with a 1990s era car with less stringent emissions controls and less fuel efficiency, that represents less benefit than had that person gone to a car that would have been slightly less efficient, but cheaper.

Don’t get me wrong, fuel efficient vehicles make a lot of economic sense, and car prices are quite low now. The idiots who bought that road-hogging Hummer H2 a few years ago are finding themselves taking up the tailpipe every time they fill the tank, and good luck finding a car dealership that would be willing to accept one of those beasts as a trade-in. That’s the market in action – fuel efficiency is a selling point regardless of what the current CAFE standards are.

And that’s the other issue here – gasoline is in the middle of a price bubble. Speculators have driven the price of oil to a level that’s substantially above its true market value. Megan McArdle believes that $30-$40/barrel oil is the equilibrium price, and I’d tend to agree with that assessment. At that price, reserves like the tar sands of Alberta become economically feasible to extract. Canada could easily end up being the next Saudi Arabia at that price levels – except with nutty socialism replacing virulent Wahhabism.

McArdle points out a fact about price levels and commodities:

It is an odd fact of human psychology that if tight supply (or excess capacity) persists for long enough, people will start acting as if the trend line is permanent. It is odd because “long enough” isn’t very long. Five years ago, people were talking about $5 a barrel oil, not realising what is perfectly obvious in hindsight, which is that low oil prices were not a result of being overtaken by a bold new future, but of the widespread recession in Asia that followed upon the 1997/8 financial crisis. Now they’re talking about $100 a barrel oil.

Neither prediction was particularly realistic – while we may be getting close to Hubbert’s Peak that’s only for cheap and easy oil. The Canadian tar sands aren’t cheap or easy, but it will provide us with plenty of energy until we can find an alternate source of energy. Acting in a panic tends to produce poor public policy, and that’s one of the reasons why it’s important not to overreact now.

What are the solutions to our energy problems? The biggest is our lack of refinery capabilities. We’re already running American refineries at nearly 98% capacity, and Katrina will put us much further behind. We need to build more refineries, but environmental regulations have made that nearly impossible. People want gas, but they don’t want a refinery near their house. Furthermore, our ports are heavily populated, and refineries naturally need to be close to where the crude oil enters the country to avoid the costs of shipping crude over land. Unless people are willing to budge, gas prices will remain artificially high.

Furthermore, as always, government adds a significant amount of cost – not just in taxes, but in regulations. A blend of gasoline for use in Chicago can’t be used in Los Angeles – meaning that refineries have to produce “microbrews” of gasoline that can’t be shipped freely across the country. If Los Angeles has a shortage of gas, and Chicago has a glut, you can’t ship more gasoline from Chicago to Los Angeles to make up the difference. That sort of artificial inefficiency makes the refinery situation even worse and dramatically increases the cost of gasoline.

The rise in gas prices is more reflective of poor public policy than anything else, and the continuing calls for more the same will only make things worse. Efficiency helps the consumer, but it doesn’t reduce the consumption of oil. Measures like price caps only ensure that consumption increases and supply goes down – putting gas stations (who only make a miniscule profit on gas sales) out of business and making life difficult for all. The market has already evolved a system for dealing with changes in commodity supplies – prices. The price of gas is helping to drive down demand, which will increase supply, which will eventually lead to market equilibrium. Trying to control this process is like trying to legislate a hurricane.

Over the long term, energy independence lies with clear nuclear power – which is why countries like China are working hard at building a network of clean pebble-bed reactors that can produce massive amounts of power without producing pollution or significant amounts of nuclear waste. Even the French get this right – 70% of their energy is nuclear. An efficient and effective nuclear program based on standardized pebble-bed reactor designs is the Holy Grail of energy policy – when electricity becomes cheap, things like electric cars become economically feasible. Right now all the electric cars in the world would just shift emissions from cars to power plants rather than reducing pollution.

The problem is not SUV drivers, the problem is that we’re caught between our need for energy and our own irrational fears. Forcing everyone into hybrid cars won’t reduce energy usage, it will increase it. Electric cars only shift the source of pollution from gasoline to our already over-extended power grid. We’re trying to have a 21st Century economy on an energy infrastructure that is stifled by onerous environmental regulation and the completely irrational fear of nuclear energy.

We can’t have our cake and eat it too. If we want cheap energy that doesn’t fuel terrorism, we have to start looking at economically and technologically feasible ways of doing it here at home. Rather than force yet another rounds of increased CAFE standards, President Bush needs to be making the case for bringing the US into the 21st Century – creating a network of safe and efficient nuclear reactors that can not only provide our homes with power, but also power the next generation of fuel cell, hydrogen, or electric vehicles.

As always, politicians prefer to make highly-visible gestures that ultimately don’t fix the problem – and more often than not make them worse. We can’t force people to drive hybrid vehicles, nor should we. What we can do is let the market do what markets have always done – utilize the laws of supply and demand to create a natural equilibrium.