U.S. May Soon Lose AAA Credit Rating

The United States is precariously close to losing its AAA credit rating, according to Congressional Budget Office projections. Jed Graham of Investor's Business Daily reported:

In the wake of the financial crisis and recession, Moody's Investors Service has brought new transparency to its sovereign ratings analysis — so much so that 2018 lights up as the year the U.S. could be in line for a downgrade if Congressional Budget Office projections hold.

The key data point in Moody's view is the size of federal interest payments on the public debt as a percentage of tax revenue. For the U.S., debt service of 18%-20% of federal revenue is the outer limit of AAA-territory, Moody's managing director Pierre Cailleteau confirmed in an e-mail.

Under the Obama budget, interest would top 18% of revenue in 2018 and 20% in 2020, CBO projects.

But under more adverse scenarios than the CBO considered, including higher interest rates, Moody's projects that debt service could hit 22.4% of revenue by 2013.

So, what is the Obama administration doing about it? Piling on more debt, of course! Sure seems like a great time to create an expensive new medical entitlement program, doesn't it?

Hat tip to James Pethokoukis.

Obamacare Already Harming Coverage

The Wall Street Journal reported that Verizon notified its employees that Congress' recently enacted health care litigation will likely result in diminished coverage:

[T]he telecom giant warned that "we expect that Verizon's costs will increase in the short term." While executive vice president for human resources Marc Reed wrote that "it is difficult at this point to gauge the precise impact of this legislation," and that ObamaCare does reflect some of the company's policy priorities, the message to workers was clear: Expect changes for the worse to your health benefits as the direct result of this bill, and maybe as soon as this year.

Most provisions will not come online for another few years, but some tax consequences are immediate:

Mr. Reed specifically cited a change in the tax treatment of retiree health benefits. When Congress created the Medicare prescription drug benefit in 2003, it included a modest tax subsidy to encourage employers to keep drug plans for retirees, rather than dumping them on the government....

In a $5.4 billion revenue grab, Democrats decided that this $665 fillip should be subject to the ordinary corporate income tax of 35%. Most consulting firms and independent analysts say the higher costs will induce some companies to drop drug coverage, which could affect about five million retirees and 3,500 businesses. Verizon and other large corporations warned about this outcome.

So, the legislation will cause a lot of employers to either dump retirement drug benefits onto Medicare, or slash coverage. Fantastic. But wait, there's more!

In its employee note, Verizon also warned about the 40% tax on high-end health plans, though that won't take effect until 2018. "Many of the plans that Verizon offers to employees and retirees are projected to have costs above the threshold in the legislation and will be subject to the 40 percent excise tax." These costs will start to show up soon, and, as we repeatedly argued, the tax is unlikely to drive down costs. The tax burden will simply be spread to all workers—the result of the White House's too-clever decision to tax insurers, rather than individuals.

This deal keeps getting worse all the time.

Prop Them Up, and Knock 'Em Back Down

"[G]overnment's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it." -Ronald Reagan

In 2008, the government convinced the American people that our financial system was on the verge of collapse.

In 2009, it assured us that it averted such a disaster.

In 2010, President Obama wants to tax the banks into the stone age.

Talk about smoke and mirrors! I have no doubt that policy makers legitimately believed that swift actions were necessary to maintain the flow of credit and prevent another Great Depression. Unfortunately, that apparent necessity gave way to politics as usual. The government is now transforming the TARP from a shield used to block financial Armageddon, and into a spear used to attack the banks—odd, since TARP's premise was that the banks are vital economic components.

The bottom line is that the Democratic leadership is fighting for political survival, and the banks are as good a bogeyman to target as any. Their primary policy objectives of economic stimulus, health care reform, and cap-and-trade have fallen flat, so they're resorting to economic populism—find someone that most people hate, and punish him.

Well, this new tax will punish the banks—along with their customers. Loans are terribly difficult to procure as it is because banks—still in survival mode—want to preserve their capital. So, if the government forcibly extracts more capital from the banks, does that mean the banks will increase or decrease their lending? The answer must even be obvious to those who support this terrible idea, but apparently they prefer populist theatrics over good policy. Hopefully this intensifies the drubbing they will incur during this year's midterm elections.

Avatar: a Film about Property Rights?

People are raving about the new film Avatar, and I can attest that it's living up to the hype—frankly, I've never seen anything like it. I won't give away anything vital, but most Americans perceive an underlying theme of racial and ethnic tension. The Chinese, however, appear to view it as a defense of private property rights. The Wall Street Journal reports:

Hollywood blockbusters aren't usually notable for their artistic or political subtlety. And James Cameron's latest sci-fi hit, "Avatar," would seem to be no exception, going by the lament of some critics that the film's impressive special effects are undercut by a skimpy story line and flat dialogue.

That, however, is not how many Chinese see the film, which tells the story of rapacious humans trying to evict the blue-skinned natives of the planet Pandora in order to extract some exceedingly valuable mineral. This is standard politically correct fare for a Western audience, conveying a message of racial sensitivity and environmental awareness. In China, however, it has more rebellious undertones.

That's because Chinese local governments in cahoots with developers have become infamous for forcibly seeking to evict residents from their homes with little compensation and often without their consent. The holdouts are known as "nail households," since their homes are sometimes left stranded in the middle of busy construction sites. More often, however, they are driven away by paid thugs. Private property is one of the most sensitive issues in the country today, and "Avatar" has given the resisters a shot in the arm.

Even in Hong Kong, the "Avatar" banner has been taken up by antigovernment activists trying to defeat a plan to demolish a village to make way for a new high-speed railway line. One mysterious benefactor reportedly donated movie tickets to the villagers to stoke their enthusiasm for protests.

Fascinating. I need to watch that movie again with that perspective in mind.

Hat tip to Prof. Donald Boudreaux at Cafe Hayek.

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.