Could Sotomayor Pass a Constitutional Law Exam?

Judge Sotomayor has botched enough elementary questions about constitutional law to give me serious pause about her judicial competence. She has taken multiple opportunities to demonstrate not only that she does not understand the infamous Kelo holding, but she doesn't even know what a fundamental right is!



Let's pretend that we're all law students, and our professor just said, "Ms. Sotomayor, please tell us about Kelo v. New London." Let's look at her statement before the Senate Judiciary Committee:

I understand the concern that many citizens have expressed about whether Kelo did or did not honor the importance of property rights, but the question in Kelo was a complicated one about what constituted public use. And there, the court held that a taking to develop an economically blighted area was appropriate.

Well, no, as Prof. Ilya Somin points out. First of all, the Kelo opinion acknowledged that the property at issue was not blighted. Second, the Supreme Court held 50 years ago in Berman v. Parker that the state may use the takings clause to develop an economically blighted area.

In fact, she doesn't even mention Kelo's major issue, which was whether the government transfer of property ownership from one individual to a private developer in order to foster economic growth constitutes a "public use" under the takings clause.

Now, let's say the professor gave her another crack at it. Here was another statement she made before the committee:

[T]he issue in Kelo, as I understand it, is whether or not a state who had determined that there was a public purpose to the takings under the—the takings clause of the Constitution that requires the payment of just compensation when something is—is condemned for use by the government, where the takings clause permitted the state, once it's made a proper determination of public purpose and use, according to the law, whether the state could then have a private developer do that public act, in essence. Could they contract with a private developer to effect the public purpose? And so the holding it in Kelo was a question addressed to that issue.

Not even close, chides Prof. Somin. Whether the state may "contract" a private individual to effectuate a public use (such as a public school or highway) has nothing to do with Kelo. The government utilizes private contractors all the time. The actual issue, stated differently, was whether the state may transfer your grandmother's house to a private developer so he can tear it down and build a parking lot for Pfizer Pharmaceuticals.

This is big deal because Kelo v. New London is an extremely important case—so important that law schools typically teach it twice: first in property law, and again in constitutional law. Virtually any law student can apparently tell you more about Kelo than Judge Sotomayor.

This is especially unfortunate because Judge Sotomayor used Kelo to further deteriorate private property rights. Her Second Circuit panel held in Didden v. Village of Port Chester that, as stated by Prof. Somin, "it was constitutionally permissible for a state to condemn property because the owners had refused [a developer's] demand to pay him $800,000 or give him a 50% stake in their business, threatening to have the property condemned if they did not comply." So, Judge Sotomayor's poor interpretation of Kelo apparently condones state-sponsored extortion. Wonderful.

To make matters worse, Judge Sotomayor doesn't even know what a fundamental right is. Here is her legal definition of a fundamental right: "The term has a very specific legal meaning, which means that [an] amendment of the Constitution [is] incorporated against the states."

No, Your Honor, you have it backwards, reminds Prof. Randy Barnett. Constitutional amendments are incorporated against the states because they protect fundamental rights. We could attribute this to a tongue slip if she didn't keep repeating it.

These are not simple mistakes because eminent domain and the fundamental rights doctrine represent critical areas of constitutional jurisprudence. A Supreme Court nominee should possess a strong command of these topics, yet Judge Sotomayor doesn't even seem to grasp their basic principles. This is very disturbing.

On the bright side, this sends an uplifting message to all the struggling law students out there who couldn't describe a case in class if their legal careers depended on it—you too could be nominated to the Supreme Court!

$300,000 per Job Purportedly Saved by Stimulus

President Obama recently boasted that his stimulus plan has "saved or created nearly 150,000 jobs."

This is a flagrantly unverifiable claim. Concrete data compiled by the Department of Labor tells us how many jobs have been lost or created, but there is no apparatus we can use to report that a job was almost lost—much less who receives the credit for saving it.

Nobody seemed to notice until former Bush deputy press secretary Tony Fratto began screaming bloody murder to the Wall Street Journal: "We would never have used a formula like 'save or create.' To begin with, the number is pure fiction—the administration has no way to measure how many jobs are actually being 'saved.' And if we had tried to use something this flimsy, the press would never have let us get away with it."

But the media has let the Obama administration get away with it, with a few exceptions.

The Associated Press reported that Obama's figure "is so murky it can never be verified." The L.A. Times reported Obama advisor David Axelrod's claim that the stimulus "has produced hundreds of thousands of jobs." The administration clearly needs to get its imaginary numbers straight.

However, let's give President Obama the benefit of the doubt, and assume that the stimulus has saved 150,000 jobs. The government reports that it has spent $43.7 billion in stimulus funds as of May 29. That means that the administration has spent nearly $300,000 for ever job purportedly saved. ($291,333, to be precise. It's easy—just divide 43.7 billion by 150,000.)

I don't know what those 150,000 men and women are doing, but unless they're curing cancer, building a better iPhone, or doing something else to drastically improve the quality of American life, I'm going to posit that their jobs are not worth $300,000 a piece of our money.

Think that's a waste of money? Just wait until the government spends the remaining $740 billion!

American Capitalism Gone with a Whimper

There can be little doubt that socialism is replacing capitalism at an alarming rate in the United States. Just look at the facts:

• De facto government ownership of large segments of the economy;
• Direct government intervention in private business models and compensation plans;
• Increased transfer payments from "the rich" to "the poor;"
• Arbitrarily favoring labor unions over the legal rights of bond holders during bankruptcy proceedings;
• Imminent regulation of every activity in the country involving CO2 emissions; and
  
• Probable government rationing of health care (nothing is "free").

The seduction of socialism has grown so strong that even the Russians (you know, the former Soviet Union?) are chastising us for abandoning our free market system.

This shouldn't be too surprising since the Russians (alongside the still-Communist Chinese) are in large part better capitalists than we are. They adopted a very low flat tax that led to explosive economic growth following its enactment.

Russian Prime Minister Vladimir Putin—a former KGB operative—recently warned the United States that "excessive intervention in economic activity" would be a costly mistake:

In the 20th century, the Soviet Union made the state's [economic] role absolute. In the long run, this made the Soviet economy totally uncompetitive. This lesson cost us dearly. I am sure nobody wants to see it repeated.

Nor should we turn a blind eye to the fact that the spirit of free enterprise, including the principle of personal responsibility of businesspeople, investors and shareholders for their decisions, is being eroded in the last few months. There is no reason to believe that we can achieve better results by shifting responsibility onto the state.

And one more point: anti-crisis measures should not escalate into financial populism and a refusal to implement responsible macroeconomic policies. The unjustified swelling of the budgetary deficit and the accumulation of public debts are just as destructive as adventurous stock-jobbing.

Unfortunately, the United States seems intent on disregarding the lessons learned from Russia, favoring a command-and-control economy over free markets.

Well, Russian newspaper Pravda recently published a pre-mortem obituary of American capitalism. The author criticized the United States for berating the lack of rule of law in Russia while repeating the mistakes of Russian socialism. The most chilling prediction: "The proud American will go down into his slavery with out a fight, beating his chest and proclaiming to the world, how free he really is."

A Communist takeover of the United States is not imminent, but the fact that we are even progressing toward that side of the spectrum is frightening. Just how far we travel down the path of prioritizing the state ahead of the individual depends upon how soon the American people snap out of their trance and end this insanity.

Cap and Trade: The $9.6 Trillion Growth Killer

The Obama administration and its congressional allies seem prepared to sacrifice the American economy on the altar of global warming. Specifically, the Waxman-Markey cap-and-trade proposal represents a crusade to drastically diminish carbon emissions in the United States.

I'm not going to debate the scientific arguments; instead, I want to make it abundantly clear that the purported benefits of this plan do not justify its excessive costs.

The purpose of cap and trade is simple: to reduce CO2 emissions by issuing permits that ration the amount of emissions a producer may generate. This gives each company an incentive to implement new technologies to reduce their emissions so it can sell its leftover permits to less efficient companies.

These permits are worth money, so their use diminishes their value (just as depleting a Starbucks gift card of its credits diminishes its value). The logical implication is that using a permit levies a cost upon its user. In order to achieve compliance with permit restrictions, the user must reduce production (and lose revenue), increase efficiency (an extra cost), or purchase another user's remaining credits (an extra cost). No matter how you look at it, this plan is expensive.

The Cost
The Heritage Foundation just released a study estimating the cost of the Waxman-Markey cap-and-trade proposal to be $9.6 trillion in lost GDP over the next twenty-five years. I repeat—$9.6 trillion in economic loss.

The Heritage report reasoned that the economy would respond to cap and trade as it would respond to an energy crisis: "The price on carbon emissions forces energy cuts across the economy, since non-carbon energy sources cannot replace fossil fuels quickly enough. Energy prices rise; income and employment drop."

How bad would this be? According to the report: a 55-90 percent increase in energy prices; an annual $1,500 increase in family electric bills; a $596 annual increase in gasoline prices; an average annual loss of 1,105,000 American jobs; and national debt increase of $29,150 per person. All within the next twenty-five years.

This program will also invite the government to further direct the American economy. The cap-and-trade program will empower the bureaucrats who administer it, and this will open the door to new forms of corruption.

As Thomas Sowell notes in Basic Economics, "bureaucrats' ability to create delay often means an opportunity for them to collect bribes to speed things up . . . . This in turn means higher prices to consumers, and correspondingly lower standards of living for the country as a whole." If you think it's hard regulating the money received by public officials, imagine trying to keep tabs on the bribes received by anonymous bureaucrats!

Arthur Laffer and Stephen Moore pointed out in The End of Prosperity that "bureaucrats will be regulating all sectors of the industrial economy and all activities of every business in America." Intrusive government entanglement is not far fetched, since the White House is now effectively telling General Motors how to run a car company.

The mere administrative compliance costs may also be staggering. As Laffer and Moore quipped, "[i]f you think the IRS is heavy-handed and intrusive, wait till companies have to comply with the new Green Police."

Of course, it's unclear how much of this accounts for American companies that will duck these insane requirements by moving their operations overseas, and taking their economic contributions and tax revenues with them.

The Benefit
The costs are tremendous, so what is the benefit? Apparently, not very much.

Climatologist Chip Knappenberger recently concluded that if Waxman-Markey yields an 83 percent emissions reduction by 2050, "the temperature reduction is nine hundredths of one degree Fahrenheit, or two years of avoided global warming."

In other words, the government is sacrificing trillions of dollars to reduce the temperature by less than one degree? Seriously?

Maybe each of us should purchase a T-shirt that reads, "We lost $9.6 trillion, and all I got was this lousy T-shirt."

But Think of the Children! (No on Prop. 1A)

California voters are voting today on whether to "fix" the budget by extending the "temporary" tax increases imposed in the latest budget—of course, tax increases are rarely temporary and hardly ever fix anything.

But the tax issue always incites from the usual suspects the same indignant response that we are letting our children down by failing to increase taxes, which is the purported panacea for our poor education system.

The first problem with this theory is that raising taxes does not necessarily increase revenues.

Dr. Arthur Laffer and Stephen Moore recently wrote in the Wall Street Journal that punitive state income tax schemes fail because Americans are inherently mobile creatures---we know how to move. They pointed out that between 1998 and 2007, "more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states . . . and relocated to the nine tax-haven states with no income tax . . . ."

These individuals tend to be job creators. Over that same period, the no-income tax states "created 89% more jobs and had 32% faster personal income growth" than the high tax states. 'Taxing the rich' may seem like a good idea, but you can't tax them once they move to another state. To the contrary, this scheme deprives California of vital economic productivity, including tax revenue and job creation.

Second, even if raising taxes would solve the situation, are the taxpayers really at fault?

Education spending within the budget increased by over a third between 2003 and 2008, keeping pace with the overall budgetary increase. Are our schools 35 percent better off today than they were in 2003? Why should we believe that throwing more money at the problem will work any better than in the past?

Perhaps the problem isn't a lack of resources, but misallocation of those resources. California is already one of the highest taxing states in the country; rather than blame the greedy taxpayer, perhaps we should ask why we're receiving so little for the money we already spend.

So, where does the problem lie? Maybe with the bureaucrats who misallocate the money budgeted by the legislature, or perhaps with the legislature for sacrificing education spending in favor of their own legislative agendas. Most likely, it is all of the above, plus any number of rules and regulations that diminish the level of service our students receive.

Let's make the money we already spend work more efficiently; until then, don't ask me for another dime, because I don't feel the least bit bad about saying no.

Obama "to get the economy off the of bubble-and-bust cyle" (???)

I have some exciting news to report: the Obama administration plans to abolish the boom-and-bust economic cycle! Austan Goolsbee—member of the Council of Economic Advisors—matter of factly declared so much during an interview with CNBC's Erin Burnett:

In [President Obama's] budget, he is trying to design a framework to get the economy off of the bubble-and-bust cycle.

Perpetual economic growth—how exciting! Now, we need only address the minor point that we attempted this in the 1960s, and failed miserably.

President Johnson declared, "I do not believe recessions are inevitable." Why should he have? Arthur Okun—the chairman of his Council of Economic Advisors—wrote that "[r]ecessions are now considered to be fundamentally preventable, like airplane crashes and unlike hurricanes."

Keynesian economists believed they could sidestep the classic boom-and-bust business cycle by using brand new computer-driven economic models to outsmart natural market forces. Robert J. Samuelson explained their folly in The Great Inflation and Its Aftermath:

They could determine how far the economy was straying from "potential output." They could also predict recessions and inflation, it was believed. Thus, corrective policies could be adopted. If the economy was below full employment, it could be nudged up. If it were in an inflationary zone, it could be nudged down. With better information and theories, economics seemed a reliable form of social engineering.

Unfortunately, the Great Depression—a deflationary crisis—conditioned economists not to worry very much about inflation. This mental blindspot was politically fortuitous, because politicians preferred rising prices over declining employment. President Nixon acutely summarized the political sentiment: "When you start talking about inflation in the abstract, it is hard for people to understand. But when unemployment goes up on half of one percent, that's dynamite."

Combine (1) economists initially apathetic about inflation with (2) a population that doesn't understand inflation and (3) elects politicians who are willing to induce inflation in order to prevent a recession, and the result was the stagflationary quagmire of the 1970s.

Mr. Samuelson describes this through the perspective of Arthur Burns, the Fed chairman from 1970-1978:

Burns conceded [in 1979] that the Fed "had the power to abort inflation at its incipient stage fifteen years ago or at any later point." If inflation is too much money chasing too few goods, the Fed could have fought it by supplying less money. Indeed, the Fed had stepped "hard on the monetary brake" in 1966, 1969 and 1974, Burns said. Unfortunately, the initial effects were a slower economy and higher unemployment---cardinal sins in the new political climate. So each time the Fed had relented too quickly before inflation was broken, bowing to criticism from Congress and the administration.

Fed Chairman Paul Volcker and President Ronald Reagan eventually slayed the inflationary beast, but the price was the severe 1982-83 recession. This required a courageous Fed chairman determined to suffocate inflation by contracting the monetary supply, and an American president willing to provide the political support necessary for the Fed chairman to do his job.

That was what happened last time the political elites assured us they could end the boom-and-bust cycle. I can only imagine how it will work out this time around . . . .

Bailing Out Responsible Homeowners (who treated their homes like ATMs)

CNBC's Diana Olick reported today that President Obama's plan to bail out "responsible homeowners" will provide incentives for lenders to forgive secondary liens---including home equity loans.

The proposal posted on the Treasury web site provides that "the program will include additional incentives to extinguish second liens on loans modified under the program in order to reduce the overall indebtedness of the borrower and improve loan performance." Page 5, paragraph vi.

So, in other words, the Obama administration has crafted a plan to assist responsible homeowners---who just happened to suck money out of their properties like ATMs. Since they are unable to pay that money back, it looks like the American taxpayers will foot the bill. Does that mean we also get to use the stuff they purchased with our money?

Deficit Spending: the New Voodoo Economics?

Rep. Linda Sanchez (D-CA) summarized Congress' apparent attitude toward deficit spending in this question/statement directed toward Treasury Secretary Tim Geithner:

Do we really need to balance the budget in order to reduce our future [] debt burden, or can we reduce our debt burden while still running deficits? Because some people would have you believe that the two must go hand in hand.

I'm of the personal opinion that deficit spending tends to increase the national debt, but what do I know?

Geithner Calls the Kettle Black

There's an old saying about the pot calling the kettle black, which is used to attribute hypocrisy to an individual who alleges another of behavior which he too is guilty of. Treasury Secretary Tim Geithner epitomized this idiom during an interview with Jim Lehrer:

I am deeply offended by the quality of judgments we've seen in the leadership of our nation's financial institutions. They've caused a very damaging loss of confidence. Financial systems require confidence; they're built on confidence. They've created a deep hole of public distrust and anger, which is enormously damaging.

Mr. Geithner, please meet the kettle. There is no doubt that the banks' horrible decisions over the past few years are key to our economic problems. However, Mr. Geithner is in no position to claim moral indignation at the banks' lack of leadership when he has provided zero leadership ever since he crashed and burned before Congress two weeks ago.

In case you missed it, Wall Street thumbed its nose at Mr. Geithner's purported plan to stabilize the financial sector through a 421-point crash of the Dow Jones Industrial Average---about a 5-percent decline. The reason? The administration led us to believe that Mr. Geithner would deliver a comprehensive plan; in fact, President Obama announced the night before that Mr. Geithner would announce "very clear and specific plans for how we are going to start loosening up credit once again."

Instead, Mr. Geithner only delivered a broad outline which did not sound much different than the Bush/Paulson plan, but for a "stress test" which---left undefined---seemed like a doorway to nationalization. Mr. Geithner highlighted his plan's ambiguity when he stated, "We're not going to put out details until we are confident that we've got the right structure that's going to achieve these objectives to try and bring private capital in, alongside government financing to help these markets get working again."

As market pundit Larry Kudlow quipped, "President Obama, please meet Treasury man Tim Geithner; Mr. Geithner, this is Mr. Obama; we'll all shake hands and have a cup of coffee together."

Alan Greenspan liked to say that the maxim First, do no harm applies just as much to the Federal Reserve chairman (and, by extension, Treasury secretaries) as it does to doctors. Well, Mr. Geithner did tremendous harm to the financial sector. His purported goal is to ensure the survival of our major financial institutions to maintain a viable credit market, but Mr. Geithner has only hastened their demise by scaring private capital away from those institutions---thereby increasing their need of government assistance.

How, then, did Mr. Geithner attempt to make amends? Well, he really didn't. Instead, he seemingly went into hiding and refused to provide any clarification. Mr. Geithner could have said any number of things; in his Lehrer interview, he stated that "these banks now have very substantial amounts of capital relative to what you would have seen in the U.S. economy going into previous recessions," and "I think [nationalization] is the wrong strategy for the country, and I don't think it's a necessary strategy." Mr. Geithner could have dramatically improved the situation by saying that two weeks ago, but he simply chose to say nothing.

The result, therefore, was what Wall Street considers a four-letter word: uncertainty. Private investors were left speculating without clear guidance about whether the White House would nationalize our banking system, and wipe out the shareholders in the process. The speculation increased as Mr. Geithner remained silent.

Mr. Obama did not help matters because, as blogger Paul Kedrosky noted, Mr. Obama talked himself into---and out of---nationalization within the course of the same speech: Mr. Obama first stated that Japan prolonged its decline by initially refusing to nationalize, whereas Sweden quickly nationalized and recovered much more quickly. This sounds like a clear endorsement of nationalization. However, he then reversed himself by pointing out that our banking system is far more complicated than Sweden's, so nationalization may not work here. His so-called conclusion:

And so what we have to do is we have to pull the Band-Aid off so we don't duplicate what happened in Japan. But we've also got to make sure that in pulling the Band-Aid off we don't just start doing so much damage that things end up getting much, much worse.

Someone needs to gently remind Mr. Obama that while deliberating out loud works well for Senators, the President of the United States is in no position to appear so wishy-washy. He is the leader of the free world, and everyone looks to him for leadership. Statements like these imply that the administration has no idea what to do.

Therefore, it is clear that the administration failed to lead the way to financial recovery following Mr. Geithner's failed speech. Who, then, was in charge? Simple: the rumor mill ran Wall Street, and the financial sector led a broad market sell-off. There was little change in fundamentals; the dominant factor was increasing fear that the White House would nationalize our banking system. This affected not only the "bad banks," but the entire sector, as fear of a domino effect caused investors to flee from the more stable banks---thereby diminishing their stability. This fear spread to all other sectors, largely because no one wants to say the government running our banks. The major stock indices have crashed about 15 percent since Mr. Geithner's testimony. Only one investment did well: gold, which is viewed as the ultimate hedge against uncertainty.

This does not mean that Mr. Geithner should have rushed into a poorly deliberated plan just for the sake of acting. The problem is that Mr. Geithner appeared to have ample time to conjure up a more detailed plan. After all, he was the President of the New York Fed and Vice Chairman of the Fed's Open Market Committee prior to his Treasury Secretary nomination; this means that he worked very closely with Ben Bernanke and Hank Paulson in their initial attempts to stabilize the financial markets. Moreover, one would think that he would have taken full advantage of the "Office of the President-Elect" to get off to a running start. Instead, it appears that he did little or no footwork prior to his confirmation. At the very least, if he had so little to say, he should have done more to control our expectations.

We saw a brief stock market respite this week when Mr. Bernanke quelled fears of nationalization, even though Mr. Bernanke is not even part of the administration: frankly, it reached the point where any guidance whatsoever was better than no guidance. Unfortunately, this respite appears to have been short lived as we now creep back to 12-year lows. Mr. Geithner claimed during the Lehrer interview that the initial sell-off following his testimony two weeks ago was really not his fault:

Well, I think it's important to see this happened against the backdrop of a deepening recession here and around the world, and that is the fundamental cause of the uncertainty you're seeing in markets everywhere and the fragile confidence we see generally.

Well, Mr. Geithner, there is no doubt that we're facing a terrible economic climate. However, inherent in the Obama administration's claim that it can make things better is the reality that it can also make things much worse. You, sir, did make things worse. Even if you refuse any responsibility for the current uncertainty, I would implore you to at least show some leadership and remember that every dollar of private capital you scare away from the banks is a dollar that the taxpayers will wind up replacing.

President Obama, please meet President Karzai

The Associated Press reports that President Obama apparently just spoke to Afghan President Hamid Karzai for the first time. Ever.

Ronald Neuman, former U.S. ambassador to Afghanistan under President Bush, speculates: "Holding off on a presidential call may be no more than a sensible decision to wait until the president really knows what he wants to say on crucial issues."

No hurry, Mr. President; it's not like the United States has deployed tens of thousands of American G.I.s to fight a war within President Karzai's borders or anything.

(Note: I know I promised I would shy away from matters of foreign policy. But this is just too ridiculous to ignore.)

Mortgaging Our Economic Future

And so, with the stroke of a pen (ten pens, actually), President Obama today signed into law a $787 billion dollar bill he assured us will help get the American economy back on its feet. At best, it will provide a shot-term economic jolt; at worst, it could massively devalue the dollar, contribute to a future inflationary crisis, and help transform America’s economic juggernaut into a Western European sloth.

The best thing that can be said is that it will create a placebo effect that will boost the economy. As I argued in my previous post, the fundamentals of the bill will not be helpful, but if enough people believe it will boost our economy, then perhaps it may become a self fulfilling prophecy. If John Q. Public believes (rightly or wrongly) that this will help solve our economic woes, we can expect consumer and investor confidence to rise, which will allow America to get back to business. Of course, I suppose it’s beside the point that Congress could have just as easily caused this placebo effect by leaving the first page of the bill blank and spending zero dollars.

The alternative theory is that this bill will grow the economy by spending money that would not have otherwise been spent. The problem is that the government cannot spend money out of thin air—it can only spend a dollar by taking that dollar away from the private sector, either now or in the future. Proponents of the bill would assert—correctly—that this spending bill supplements (rather than replaces) current spending because it is 100 percent deficit spending, which means the private sector does not yet have to pay for it. Unfortunately, the irrefutable implication is that the government must gradually remove this money from the private sector for a long time to come. In short, we are mortgaging our economic future for the sake of the present.

The Congressional Budget Office—a non-partisan federal agency tasked with assisting congressional decisions by providing economic analysis—predicts that this bill will hurt our economy in the long run. It estimates that the legislation in the short run will “raise GDP and increase employment by adding to the aggregate demand” over the next few years. However, the legislation will “reduce output slightly in the long run.” This is because the resulting debt will “‘crowd out’ private investment” in the long run. Therefore, the CBO predicts reduction in future GDP by as much as .2 percent, reflected largely in lower wages because “workers will be less productive because the capital stock is smaller.”

The bill’s economic effects are even more serious when you account for its potential to devalue our currency, which the CBO report does not seem to consider. Our national debt stood at $8.95 trillion at the end of 2007, and equaled 65.5 percent of our GDP. The national debt presently amounts to $10.7 trillion and our GDP totals $14.3 trillion, so our national debt is now approximately 75 percent of our GDP. To put these figures in perspective, our national debt has not occupied such a huge percentage of GDP since the early 1950s—while we were paying for World War II!

This would be bad enough, except we’re just now getting started. The Congressional Budget Office already predicted a $1.2 trillion deficit for the coming fiscal year. President Obama stated that “unless we take decisive action, even after our economy pulls out of its slide, trillion-dollar deficits will be a reality for years to come.” The Treasury is reportedly considering spending as much as $2 trillion to stabilize the financial system. Anyone care to predict what percentage of GDP our debt will consume after all is said and done?

There is no doubt that President Bush and his Republican congressional majorities committed fiscal malfeasance by overspending during the boom years; as a result, our nation’s overbearing debt makes it very difficult to justify spending increases during the bust years. Justified or not, however, the United States is spending it. I can’t help but wonder whether our trading partners who largely finance our debt—with China as our number one creditor—will continue doing so. Yes, our creditors would harm their own economic interests by inciting dollar depreciation, but it would also be masochistic of them to continue buying debt they doubt we can repay without printing more money out of thin air.

This, of course, would result in inflation. The M2 indicator of our money supply has already increased at an annual rate of about 20 percent since August, so the Federal Reserve will already have a difficult time removing all of this excess liquidity from our system once our economy recovers. Imagine how much worse this situation would become if we're forced to essentially "inflate" our way out of debt.

Combine potential devaluation with classic monetarist inflation, and Americans will watch the price of their goods skyrocket—and our standard of living plummet. Of course, I could always be wrong. I’m still saving up the money to purchase a crystal ball and I don’t have a PhD in economics, but it seems clear that the economic stimulus plan is a recipe for disaster. How can we obtain long-term prosperity by mortgaging our economic future for the sake of temporary “stimulus” that so many people doubt will really work? Make no mistake—I do believe the economy will naturally rebound over the next year or two, due to its cyclical nature. But this “stimulus” plan will have little (if anything) to do with it, and it will simply open the door to future economic pain.

A Stimulus Plan to Nowhere

I posted the following thoughts on a Facebook note on February 4, and it generated considerable debate. It is particularly timely since Congress is expected to pass the final version of the stimulus bill over the next few days.
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The riddle constantly implied through the 2008 election cycle was, “Who could possibly screw up our economy worse than the Republicans?” The answer has become fairly obvious: the Democrats!

I normally abhor the partisan Republican-Democrat finger pointing as the lowest form of political hackery. Unfortunately, the Democratic leadership has spent the past few weeks living up to the odious caricatures of bleeding heart big spenders who place their social agendas ahead of economic reality. Specifically, their introduction of a welfare expansion bill disingenuously labeled economic stimulus has forced me to question their intentions and their competence.

President Obama spent the past few months pledging an economic stimulus bill that will boost our economy through infrastructure spending and tax cuts. I am not a fan of Keynesian-style government spending stimulus because, frankly, I don’t think it works. To make a long story short, government can only spend by preventing private sector spending (now or in the future), and it typically takes years for infrastructure spending to enter the economy due to the enormous planning required before ground can be broken. However, I at least acknowledged that such a bill would cause a “placebo effect”: even if it does not in fact stimulate growth, its enactment will inadvertently stimulate growth by boosting consumer and investor confidence.

Unfortunately, the so-called American Recovery and Reinvestment Act does not live up to President Obama’s description. He promised infrastructure, but Congress instead delivered a wish list of liberal policy objectives aimed at expanding the welfare state rather than growing the economy. The $816 billion House version entails $604 billion in new spending.

This includes $20.0 billion for food stamps, $20.4 billion allocated to the Department of Health & Human Services, $17.6 billion for student financial aid, $29.1 billion for public school programs, $20.0 billion to renovate those same schools, $11.2 billion for housing assistance programs, $19.5 billion for education grants, $27.1 billion for unemployment benefits, $13.3 billion for health insurance for the unemployed, $11.1 billion for “Other Unemployment Compensation,” and $20.2 billion for Medicaid and Medicare.

By contrast, only $30.0 billion is allocated to highway construction.

Feeling a bit swindled, now, aren’t we? Check out an article by Jim Manzi discussing this in further detail.

This plan does not stimulate economic growth; it simply recycles money. What do I mean? Well, understanding the economic impact of this proposal requires comprehension of the basic economic principle that the government cannot “create” spending; it can only spend money that it takes from the private sector, either through taxes or borrowing. The proponents of this proposal claim that it will redistribute wealth from “the rich” to “the needy,” who will stimulate the economy by using their government payments to purchase of goods and services.

In other words, the plan is for the government to take money away from “the rich,” and give it to “the needy,” who will in turn give it back to “the rich” when they purchase goods and services. This clearly does not grow anything, except for the size of government and the size of our national debt. All this does is transfer the same dollars back and forth between the same people, minus the dollars retained by the bureaucratic middlemen within the federal government. This is simply welfare expansion window dressed as economic stimulus.

Republican Senators actually responded—much to my surprise—with a decent alternative. This bill, priced at $445 billion is about half as large as that passed by the House, and is laced with supply-side tax cuts. It slashes payroll taxes for all workers and income tax rates for lower income earners, as well as substantial tax credits for home buyers. The hallmark of the bill, however, is its reduction of the corporate tax rate from 35 to 25 percent, and small business filing as individuals by the same margin.

Talk about incentivizing growth! The United States levies some of the highest corporate tax rates in the developed world, and most people do not realize that most “individuals” taxed at the 35 percent rate are actually small businesses. This will provide them with a much needed shot in the arm to weather the storm and incentivize growth. More money in their pockets translates into fewer layoffs and pay cuts, and—as experience has consistently shown—higher tax revenues. If you don’t believe me, just check the official Treasury data for yourself. Cross reference the supply side tax cuts of the 1920s, 1960s, 1980s, and 2000s with those figures, and you’ll see that the subsequent economic growth resulted in higher revenues despite the lower rates.

Of course, the Republican counterproposal was not perfect. It still contained $48.15 billion in welfare expansion, but at least its remaining expenditures contain a far higher proportion of infrastructure than its competitor. I also like the fact that its expenditures cease following either three years or two consecutive quarters of 2 percent GDP growth, whichever comes first. Additionally, it called for a subsequent 2 percent across-the-board spending cut to help balance the budget and a commission to examine the long-term viability of Social Security, Medicare, and Medicaid. Too bad the Democratic majority never took it seriously.

Sen. McCain introduced this counterproposal, and you know what? It really makes me think I underestimated him during the election! Maybe he has a chip on his shoulder to prove that he received an unfair shake in November. If so, I really hope it motivates him to remain a vocal proponent of such beneficial measures—perhaps recreate himself as a Supply-Side Maverick rather than a Campaign Finance/Amnesty/Global Warming Maverick.

Meanwhile, President Obama is doing a pretty amazing job of talking down the economy. He recently stated that failing to pass this bill “will turn a crisis into a catastrophe.” Perhaps President Obama and his Democratic colleagues should turn their attention to finding that Hope they used to get elected in November and leave economic stimulus to the Republicans.

The Audacity of Reason

Welcome to the inaugural posting of The Audacity of Reason. Its primary purpose is to advocate the reasonable application of economics and law within the public policy arena. As the title implies, I believe that reasonableness is sorely lacking in modern politics. “Reasonable” is, of course, a dangerously ambiguous term, so the integrity of this blog demands that I provide at least a brief ideological synopsis so you understand what I believe “reasonable” is. Although I cannot encapsulate my ideology within a few paragraphs, this should at least give you an idea of where I’m coming from:

• Politically, I’m a libertarian-leaning Republican based upon the core notion that the primary role of a just government is to protect the people from one another and foreign invaders while restraining itself from meddling in the people’s private affairs. Conversely, I reject the paternalistic view that the government should protect the people from themselves.

• Economically, I believe supply-side economics is the best path to prosperity and individual liberty. This includes advocacy of low taxes, minimal government, balanced budgets, free trade, and price stability. I believe each of these basic tenets has greater potential to alleviate poverty and promote prosperity than any government program ever could.

• Legally, I advocate a strict textualist interpretation of the Constitution based upon the original understanding of its provisions, to the degree we can divine such an understanding from the historical record. Consequently, I generally reject the idea of a “living constitution” because a constitution that means whatever we want it to mean really doesn’t mean very much at all. I do, however, keep an open mind for interpreting provisions whose original meaning is unclear.

I hope this elucidates my core political, economic, and legal values. You may be wondering why I don’t have much to say about foreign policy, and that is because I simply don’t know enough about it to discuss it in great detail. My law school education qualifies me to discuss law, and my interest in reading about economics qualifies me to discuss economics. I do have certain ideological predilections when it comes to foreign policy, but I don’t keep up with it as much as I should, so I won’t waste your time by blogging about topics in where I lack a very sophisticated understanding.

With that being said, I’m really looking forward to this opportunity not just to post my views, but to read your comments. I have utmost confidence in the propriety of my opinions, but I recognize that intelligent people can view the same facts very differently, and therefore reach very different conclusions. These topics may lead to heated discussions, but as long as we do our best to maintain a respectful atmosphere, I believe we will all benefit from an ongoing dialogue.