The Great Debate

President Barack Obama’s decision last week to cut the defense budget by $487 billion over the next 10 years was met with cries of derision from his critics (“inexcusable,” said GOP front-runner Mitt Romney) and shrugs of acceptance from his supporters. The reduction’s two headlines: 1. One hundred thousand troops are being chopped from the Marine Corps and Army; 2. The entire U.S. foreign policy focus will begin to shift from the Near East to the Far East (anxieties about China having replaced—or at least settled alongside—our permanently ingrained fears of Middle Eastern terror). The cuts themselves, though, are less significant as fiscal policy than as a statement about President Obama’s relationship with the Pentagon: Barack is taking it over.

That President Obama wasn’t really in charge of the Defense Department might come as something of a shock. He is, after all, the commander in chief. But considering the size of the nation’s defense apparatus, it shouldn’t. The Pentagon has become the 51st state—America’s largest bureaucracy, employing three times more people than the population of Vermont and Wyoming combined. Its capital is the Five-Sided Puzzle Palace, as my journalist friends fondly call it, where 23,000 work daily. Its other residents are the 3.2 million military, intelligence and civilian personnel who live inside its borderless confines around the globe. And since the attacks of September 11th, the influence of the Pentagon’s constituency has grown exponentially, its budget increasing from $295 billion to $549 billion, sucking up some 54 percent of federal tax dollars.

The Pentagon has found plenty of ways to spend all that cash. In 2011, the DoD blew $20.2 billion on air conditioning in Iraq and Afghanistan, equivalent to the entire NASA budget. There are more members of the U.S. military bands—and more sailors on a single aircraft carrier—than in the State Department’s entire foreign service. Up close, the largesse of the Pentagon is hard to miss as well: When top generals visit a country overseas, they often travel in their own private jets, with an entourage of dozens. Top diplomats fly commercial, business–or first-class, if they’re lucky. (Meanwhile, in Foggy Bottom, Secretary of State Hillary Clinton forbade business-class travel for State officials traveling to Afghanistan in 2010, citing budgetary concerns, department officials have told me privately.)

The Pentagon’s unprecedented power and influence turned it into a fierce rival of the White House. And so when President Obama crossed the Potomac last Friday Thursday, he was on a mission to reclaim enemy territory. In an unusual move, he made the budget announcement from within the Pentagon itself. It was something of a triumph that he chose to do it there. Upon arriving in Washington three years ago, Obama had a very different reception from the brass. The building was populated by Republicans. The last three defense secretaries had been with the GOP, and the rank and file were still supporters of the previous administration. They were heavily invested in the Iraq War—a war Obama had called “dumb.” At one of his first meetings in the Pentagon in January 2009, as I recount in my new book The Operators, he met General Stanley McChrystal, who would later confide to his staff that Obama appeared “uncomfortable.” A senior official at the meeting described the president as “intimidated by the crowd.” Months after the meeting, the Pentagon’s leadership would take advantage of this perceived weakness, pushing the president to escalate the war in Afghanistan and tripling the scope of the conflict.

The tension between the president and his generals reached its climax in June 2010 in the weeks after I published a Rolling Stone story exposing the contempt the military leadership had for their civilian counterparts. The president fired McChrystal and replaced him with General David Petraeus (tying Petraeus to the fate of the doomed mission, an association that Petraeus had wanted to avoid, according to McChrystal). Within the next year, Defense Secretary Robert Gates would retire as well (but not before Obama twice overruled his advice—on Libya and the Bin Laden raid) and was replaced by Democratic ally Leon Panetta. Petraeus came home from Kabul in June 2011, and was quickly defrocked and installed at the CIA (preventing the popular general’s potential and oft-rumored run for the presidency, another outcome the White House wanted to avoid). When Petraeus pushed to move troops to eastern Afghanistan, rather than bringing them home, Obama overruled him, prompting General John Allen (the man there now) to admit the president was no longer following the military’s advice. Either by accident or by design, the young president had neutered his formidable opposition. The celebrity generals were gone, a friendly Defense Secretary was in and a string of what were perceived as foreign policy successes had been accomplished.

By David Callahan
The views expressed are his own.

Nearly every day, if not every hour, some politician proclaims that taming America’s budget deficit requires “hard choices.” Strangely, though, few talk about perhaps the toughest dilemma facing the supercommittee, and the rest of Congress: How to reconcile the needs of old and young Americans.

Both groups have urgent and growing claims on the public purse. Four million seniors live below the official poverty line and millions more hover just above that line – contrary to the popular image of well-heeled retirees. And because the Baby Boom generation hasn’t saved nearly enough for retirement, such hardship is likely to get worse. Deficit hawks talk about cutting Social Security benefits and limiting Medicaid payments for nursing homes, but the truth is that seniors will need a more generous safety net in coming decades than what the U.S. now has.

Meanwhile, a new report on the “State of Young America” by Demos (where I work), argues that America is way under-investing in the next generation. Too many young people who graduate from our under-funded public schools aren’t ready for college and can’t earn a living in today’s low-wage economy. Those who do go to college often can’t afford to finish their degrees, and debt among college graduates has soared to record levels. Young adults trying to start a family also struggle with sky high costs for childcare, housing, and healthcare. At the same time, median earnings for young adult men with college degrees have barely budged since 1980.

By Robert Frank
The opinions expressed are his own.

What do the following slogans have in common?

“All taxation is theft.”

“It’s your money and you know how to spend it better than any bureaucrat in Washington.”

“It’s unjust to tax some people more heavily than others.”

“Taxing the rich kills the geese that lay the golden eggs.”

Although each has been repeated so often by conservatives during recent decades as to have acquired an air of settled truth, each is also either clearly false or conveys no useful information. A more troubling shared feature of these slogans is that they are causing serious harm. Their enthusiastic embrace by Tea Party members and large
factions of the Republican Party now threatens to transform the United States economy, once the envy of the world, into an economic backwater.

Let’s consider them in turn.

“All taxation is theft” is easily the most mindless of the batch. Functionally, it’s equivalent to the “It’s your money…” entry, since the ostensible point of each is that meddlesome government officials shouldn’t be allowed to confiscate the hard-won fruits of our own talent and effort. But there isn’t much economic value to confiscate in countries that lack well-defined and enforced systems of property rights and the public infrastructure required for highly developed and specialized markets. None of that could exist unless government could levy mandatory taxes. No informed person would seriously consider living in a society whose government lacked that power—think Somalia, or the Sudan—even apart from the concern that it would quickly be conquered by an army supported by a neighboring country’s mandatory taxation.

By Nicholas Wapshott
The opinions expressed are his own.

Is the Tea Party running out of steam? I ask because there appears to be growing evidence that the Mad Hatters’ wild ride, culminating in Obama’s defeat last month over the debt ceiling at the hands of the Tea Party in Congress, has slowed to a trot. Exhibit one, the entrails of the most recent Pew poll where there is a startling finding. Just two months ago, those who believed trimming the deficit was the nation’s top priority outnumbered those who wanted more spending “to help the economy recover” by ten percent. Today, the number who advocate more government spending to fix the lackluster economy are neck and neck with those who wish to cut the budget deficit without delay.

Why the shift? Well, it seems that some Americans have changed their minds over the issue that lies at the heart of our politics. Today’s great political debate divides along the lines established eighty years ago by John Maynard Keynes and Friedrich Hayek. In 1932, when one in four Americans was out of work, Keynes suggested a mixture of policies to pump money into the economy to increase demand and get people back into jobs: keep the cost of borrowing cheap so that businesses could expand; invest in public works that directly employs the jobless; and cut taxes to put cash into people’s pockets. Hayek countered that such expansionist policies were unlikely to work and would have unintended consequences. At the very least they would in the long run fuel inflation and, when the government took its foot off the gas, cause businesses artificially boosted by the measures to go bust.

When Obama was elected in November 2008 he faced an economy that was teetering on disaster. His answer was a Keynesian stimulus package that meant plunging the nation even deeper into debt than George W. Bush had left it after bailing out the banks, enacting a huge tax cut and funding two overseas wars. No sooner had Obama adopted a Keynesian remedy than some of his opponents demanded a Hayekian antidote: paying down the debt as soon as possible. This outbreak of electors’ remorse gave rise to the Tea Party whose argument appeared to be that if a family has to pay off its overdrafts and credit card borrowings when it is going bankrupt, surely a nation should do the same. The 2010 midterms saw the election of a wave of Tea Party candidates, most of whom had pledged not to agree to anything that would either raise taxes or fail to address the national deficit. The raising of the debt ceiling, which had always been a routine matter between the two parties, became a pitched battle, with the president having to bow to the Tea Party’s principles or allow America to default on its debts.

By Robert H. Frank
The opinions expressed are his own.

Reuters invited leading economists to reply to Lawrence Summers’ op-ed on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Franks’s reply. Here are responses from Laura Tyson, Benn Steil, Russ Roberts, Donald Boudreaux and James Pethokoukis as well.

I’m in general agreement with Larry Summers’ piece. If it had been my column to write, I’d have been more emphatic about how much more important the unemployment problem is than the deficit problem. Deficits need to be reduced, yes, but not in the midst of a deep downturn. If we could put just half of the people who are either unemployed or underemployed back to work, for example, national income would be larger by more than ten times the interest we’re paying on the 2011 deficit. The extra income tax revenue alone would be enough to cover the interest on last year’s debt.

I’d also have hit harder on the claim by ostensible deficit hawks that extra spending right now would impoverish our grandchildren. Some of the most vivid and easily understood counterexamples involve infrastructure maintenance. According to the Nevada Department of Transportation, repairing a damaged 10-mile stretch of Interstate 80 would cost $6 million if we did the work today. But if we postpone repairs, weather and traffic will continue to damage the roadbed. If we wait just two years, the cost of bringing that same stretch of road up to par rises to $30 million. There are thousands of similar projects crying out to be done.

By Douglas Holtz-Eakin
The opinions expressed are his own.

America is on a path to fiscal disaster.  The skyrocketing national debt will continue to force the Nation to make fundamental decisions about what the government will and will not do, and how to share budget resources across competing programs.  Too bad Congressional budget rules give misleading signals on the best path forward.

In spite of the impending crisis, in just the past two years Congress and the President have committed the United States government to lend directly more than a trillion dollars of student, home and other loans.  That is over a trillion dollars of new borrowing at a time when debt threatens the foundations of the U.S. economy.  More startling, the borrowing was done in the name of deficit reduction.

How could this be?

Budget law requires the Congressional Budget Office (CBO) to assume that loans made directly by the government earn huge profits, with virtually no risk that such estimates could be wrong.  As a former CBO Director, it is easy for me to point out that most of the governments financial transactions are fraught with risk – the support of Fannie Mae and Freddie Mac being the prime examples that came back to haunt the taxpayer.  So it is a paper fantasy that the federal government will surely recoup more money than it lends out.  If a bank were to use the same accounting, the Securities and Exchange Commission would charge them with overstating their earnings and throw the book at them.  Congress gets to call these phantom profits “savings.”

By Nicholas Wapshott
The opinions expressed are his own.

In medieval times, a key member of a monarch’s retinue was the food taster, a hapless fellow who ate what his master was about to eat. If the taster survived, the food was deemed safe for the king’s consumption. President Obama has a taster of sorts in David Cameron, the British prime minister, who has embarked upon an economic experiment that echoes the recipe of wholesale public spending cuts and tax hikes needed if both sides in Congress are to agree to raising the federal government debt ceiling. How the British economy is faring offers Obama an idea of what a similarly radical policy of cutting and taxing here would mean to the American economy.

Cameron’s election in May 2010 coincided with the start of the Greek debt crisis. The Bank of England governor Mervyn King warned him that the public debt in the UK was so large that Britain, too, might see its lending become impossibly expensive, so Cameron decided that there was no time to lose in putting the fiscal books in order. He decided to slash public spending by 25 per cent over four years and immediately raise value added tax on goods and services from 17.5 to 20 per cent. Such a radical remedy found favor with the rump of British Conservatives who felt that Margaret Thatcher’s free-market, small government, “sound money” policies of the Eighties had not been pressed to their limit. In turn, Thatcher’s prescription to reduce the size of the state derived from her favorite thinker Friedrich Hayek, the author of “The Road to Serfdom,” who believed like many Tea Party supporters that government intervention inevitably leads to tyranny.

Cameron’s experiment in applying a radical cure to the British economy caught the attention of a number of conservatives here, among them George W. Bush’s speechwriter Michael Gerson, who wrote in the Washington Post, “If Cameron’s approach works — dramatically cutting deficits without stalling economic growth — it will be an obvious, powerful example for America.” “If only the Obama administration and the U.S. Congress had been so courageous. Instead, they are choosing to put off these big decisions,” moaned Matthew Bishop, New York bureau chief of the Economist, in a piece co-authored with Michael Green in the Wall Street Journal. Even Treasury Secretary Tim Geithner thought the British experiment worth trying. “I am very impressed, as one man’s view looking from a distance, at the basic strategy [Cameron] has adopted,” Geithner told the BBC.

Now that federal government shutdown has been averted, it's a good time to examine what's at stake for most of America in the crucial next round of budget talks.

Not doing anything to reduce the size of government debt will be catastrophic. Not much quibble there. But acting hastily and cutting the wrong things can be even more costly to social and economic welfare.

Neither the Republican nor the Democrat's budget plans for 2012 will meet the major challenge of sustaining social programs while cutting the most egregious waste.

Congress needn't be cruel to be kind in cutting the U.S. budget deficit while saving popular programs like Social Security and Medicare.

That's not to say that taxes don't need to rise, deductions pared and giveaways to corporations eliminated. That all needs to be considered, although the recent deficit commission report doesn't do the dirty work in an equitable manner. It places far too much emphasis on paring Social Security benefits, a system that works and won't be in deficit mode for several decades.

There's plenty of pain to go around in the deficit commission's proposal. The most compelling trade-off is based on the idea that lowering personal income-tax rates will achieve some long-term economic stimulus. That thinking hasn't worked in the past and won't work now.

-Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. Join Reuters for a live discussion with guests as UK Chancellor George Osborne makes  an emergency budget statement at 12:30 p.m. British time on Tuesday, June 22, 2010.-

George Osborne must be thankful to Don Fabio and his boys for ensuring that Wednesday’s tabloids will have other things to think about than the Budget, because it is going to be one of the toughest ever.

There is every indication the advance billing is more than just news management. The pain is going to be frontloaded for two reasons.