I do a good bit of the researching and writing of these weekly E-Letters during the weekends when I am not distracted by phone calls, meetings and other details of the office. Normally, I like to have my letters outlined and largely written by the time I hit the office on Monday mornings. This past weekend, however, was Easter weekend, and I didn't want to work during one of my two favorite holidays (and with my son home from college).
What I have done this week is to reprint some of the most interesting articles I have read over the last week. Each of the four articles below makes some excellent points and offers perspectives you may not have considered.
The first two articles are from well-known writers that have come to agree with me that we are headed for another financial crisis if President Obama continues his plan to double the national debt over the next decade. I trust you will find their perspectives on this critical issue very insightful (and alarming).
The third article is from Larry Kudlow, well-known economist and host of CNBC's The Kudlow Report, who argues that Obama's latest plan to use TARP money to bail out homeowners who are about to default is just plain wrong and unfair to those lower and middle class families who are working extra hard to make their mortgage payments. I agree.
The final article is a column by George Will of ABC News' This Week. As you may know, Obama plans to take up immigration reform very soon. After all, he needs a huge block of new voters since he has infuriated tens of millions of Americans with the ramming of healthcare reform down our throats. George Will makes a brilliant suggestion for how to solve the illegal immigration problem once and for all that I'll bet you haven't thought of.
Planting the Seeds of Disaster
by Robert Samuelson
WASHINGTON — When historians recount the momentous events of recent weeks, they will note a curious coincidence. On March 15, Moody's Investors Service — the bond rating agency — published a paper warning that the exploding U.S. government debt could cause a downgrade of Treasury bonds. Just six days later, the House of Representatives passed President Obama's health care legislation costing $900 billion or so over a decade and worsening an already-bleak budget outlook.
Let's be clear. A “budget crisis” is not some minor accounting exercise. It's a wrenching political, social and economic upheaval. Large deficits and rising debt — the accumulation of past deficits — spook investors, leading to higher interest rates on government loans. The higher rates expand the budget deficit and further unnerve investors. To reverse this calamitous cycle, the government has to cut spending deeply or raise taxes sharply. Lower spending and higher taxes in turn depress the economy and lead to higher unemployment. Not pretty.
Greece is now experiencing such a crisis. Until recently, conventional wisdom held that only developing countries — managed ineptly — were candidates for true budget crises. No more. Most wealthy societies with aging populations, including the United States, face big gaps between their spending promises and their tax bases. No one in Congress could be unaware of this.
Two weeks before the House vote, the Congressional Budget Office (CBO) released its estimate of Obama's budget, including its health care program. From 2011 to 2020, the cumulative deficit is almost $10 trillion. Adding 2009 and 2010, the total rises to $12.7 trillion. In 2020, the projected annual deficit is $1.25 trillion, equal to 5.6 percent of the economy (gross domestic product). That assumes economic recovery, with unemployment at 5 percent. Spending is almost 30 percent higher than taxes. Total debt held by the public rises from 40 percent of GDP in 2008 to 90 percent in 2020, close to its post-World War II peak.
To criticisms, Obama supporters make two arguments. First, the CBO says the plan reduces the deficit by $138 billion over a decade. Second, the legislation contains measures (an expert panel to curb Medicare spending, emphasis on “comparative effectiveness research”) to control health spending. These rejoinders are self-serving and unconvincing.
Suppose the CBO estimate is correct. So? The $138 billion saving is about 1 percent of the projected $12.7 trillion deficit from 2009 to 2020. If the administration has $1 trillion or so of spending cuts and tax increases over a decade, all these monies should first cover existing deficits — not finance new spending. Obama's behavior resembles a highly indebted family's taking an expensive round-the-world trip because it claims to have found ways to pay for it. It's self-indulgent and reckless.
But the CBO estimate is misleading, because it must embody the law's many unrealistic assumptions and gimmicks. Benefits are phased in “so that the first 10 years of (higher) revenue would be used to pay for only six years of spending (increases),” ex-CBO director Douglas Holtz-Eakin wrote in The New York Times. Holtz-Eakin also noted the $70 billion of premiums for a new program of long-term care that reduce present deficits but will be paid out in benefits later. Then there's the “doc fix” — higher Medicare reimbursements under separate legislation that would cost about $200 billion over a decade.
Proposals to control health spending face restrictions that virtually ensure failure. Consider the “Independent Payment Advisory Board” aimed at Medicare. “The Board is prohibited from submitting proposals that would ration care, increase revenues or change benefits, eligibility or Medicare beneficiary cost sharing,” says a summary by the Henry J. Kaiser Family Foundation. What's left? Similarly, findings from “comparative effectiveness research” — intended to identify ineffective care — “may not be construed as mandates, guidelines or recommendations for payment, coverage or treatment.” What's the point then?
So Obama is flirting with a future budget crisis. Moody's emphasizes two warning signs: rising debt and loss of confidence that government will deal with it. Obama fulfills both. The parallels with the recent financial crisis are striking. Bankers and rating agencies engaged in wishful thinking to rationalize self-interest. Obama does the same. No one can tell when or whether a crisis will come. There is no magic tipping point. But Obama is raising the chances.
Robert J. Samuelsonis a contributing editor of Newsweek and The Washington Post where he has written about business and economic issues since 1977. His columns appear in both publications. His articles also appear in the Los Angeles Times, The Boston Globe, and other influential newspapers.
Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.
The Age of Obama
by Bill Frezza
Snatching victory from the jaws of defeat, after a tumultuous year of political theater, the Age of Obama has dawned.
With legislative success however tarnished by rancor and dissent, the hopes and dreams of generations of Progressives have been fulfilled. The trifecta of Social Security, Medicare, and the first installment of Universal Healthcare are now the law of the land.
Based on a common set of financial principles and an unshakable faith in the wisdom of government the productive power of the young, the healthy, the successful, and generations yet unborn are now fully lashed to the yoke of redistribution. The poor, the old, the infirm, the government employee, the union worker, the dropout, and the slothful have cause to rejoice as their party has delivered the goods.
Or so they think. Let's take a quick look at the numbers.
According to the most recent Social Security and Medicare trustees report, the unfunded liabilities of these New Deal and Great Society programs exceed $100 trillion dollars. Add the unfunded Medicaid mandates imposed on the states along with the pension liabilities of millions of federal, state, and local government employees and the total becomes almost impossible to comprehend.
Try this on for size. If you confiscated the entire Gross Domestic Product of the US for ten years you couldn't cover all these liabilities.
Confiscate the GDP? That's Communism! OK, how about confiscating half the GDP? Too late, that money is already spoken for.
Combined Federal, State, and Local government spending is now at 37.5% of GDP and heading north. The European Union, our Progressive model, has already passed the 50% mark.
Note that these confiscatory levels of taxation can't even cover this year's spending. None of the money already being diverted from the economy is being used to shore up the aforementioned liabilities. These not only remain but are swelled by annual deficits.
Get the picture? Obama just handed the American people an empty gift box. Good luck collecting.
FDR promised that Social Security would never lead to runaway spending. LBJ promised the same for Medicare and Medicaid. President Obama is promising that his Universal Healthcare program will not only pay for itself but will generate savings that can be used to reduce the deficit.
The American people cannot possibly be so stupid as to take these political promises at face value. Somehow supporters must imagine that all these bills can be paid for by “the rich” while 95% of Americans enjoy tax cuts and subsidies. As citizens are invited to stick their hands ever deeper into their neighbors' pockets, a majority of voters must believe they are going to get more than they have to give.
And why shouldn't they? It's worked so far hasn't it? Our progressive income tax system has reached the point where half the population pays no income tax at all. What do they care if tax rates have to go up? And today's retirees, like Bernie Madoff's early clients, have already collected many times more than they paid in to Social Security and Medicare. Their thanks? A parting gift of consuming 30% of the nation's healthcare budget in their final year of life.
FDR and LBJ died before anyone had to deliver on the promises they made. The problem for Obama is that his predecessor's bills are coming due just as he is piling on more.
Social security recently passed its high water mark. The program now and forevermore will be paying out more than it takes in. In order to write these checks, the Social Security Administration has to redeem the vast mountain of IOUs it received when former Congressmen plundered every last penny of the so called “trust fund.” There is only one place today's Congress can go to redeem these IOUs, and that is to the general taxpayer.
Kill the rich and eat them, there are too few to cover all these bills. The Age of Obama will certainly bring us equality. We will all be equally broke.
Meanwhile one form of inequality continues to grow unchecked, unnoticed as the media devotes all its energy to chasing banker bonuses. Studies show that government workers now get $1.45 in pay and benefits for every $1 received by comparable workers in the private sector. This should come as no surprise. While private sector unions have largely bankrupted their employers, save those like General Motors that have been nationalized, public sector unions have no such limitations. Representing a solidly Progressive voting bloc, the swelling ranks of public employees can be counted on to pass their bills along to the rest of us as they demand ever larger chunks of a shrinking pie.
This tragedy of abject profligacy can end only one way. Watch the drama unfolding in the land where democracy was born. German charity might allow the Greeks to enjoy their Progressive lifestyles a bit longer but eventually the disease of runaway social democracy will bankrupt the rest of Europe too.
Who wants to bet whether the Chinese will continue financing us long enough to be drawn down this rat hole of self-inflicted fiscal immolation?
Bill Frezza is a partner at Adams Capital Management, an early-stage venture capital firm. He currently posts a column every Monday at RealClearMarkets.com, a site devoted to market-related news, analysis and commentary. If you would like to subscribe to his weekly column, drop a note to [email protected].
Lower Prices, More Foreclosures Will Solve Housing
by Larry Kudlow
With everybody focused on Obamacare, and its new entitlement spending and taxing, the administration has tried to sneak in yet another bailout for housing. Yet again, Team Obama is rewarding reckless behavior, punishing the 90 percent of responsible homeowners who are making good on their mortgages, and setting up a greater moral hazard that will surely lead to an expansion of bailout nation.
I'm talking about an add-on to HAMP, the $75 billion Home Affordable Modification Program, which has been a dismal failure. In fact, the entire foreclosure-prevention effort — including forgiveness of mortgage-loan principal — has been a failure.
The Office of the Comptroller of the Currency reports that nearly 60 percent of modified mortgages re-default within a year. And now comes a new brilliant idea that if you live in your main residence, have a mortgage balance of less than $729,750, owe monthly mortgage payments that are not affordable (meaning greater than 31 percent of income), and you demonstrate a financial hardship, the government will subsidize you by offering TARP money to banks and other lenders to reduce your outstanding mortgage balance.
Former Bush economist Keith Hennessey highlights the outrage that Team Obama would actually subsidize people making up to $186,000 a year who have a mortgage balance of over $700,000. This isn't even a middle-class entitlement. It's an upper-middle-class entitlement. Actually, at $186,000, it's virtually a top-earner entitlement, according to Team Obama's definition of rich people eligible for tax hikes.
I mean, for a measly $14,000 more in income, the White House will jack up your top personal tax rate and your capital-gains tax rate. But now, for just less than $200,000, you get a brand new spiffy forgiveness plan for your mortgage.
It's a complete outrage.
I don't want you to pay for my mistakes. And I don't want to pay for yours. That's an oft-heard Tea Party complaint, and it's a good one. Why should the 90 percent of folks who make good financial decisions on their homes have to pay for the 10 percent who did not?
Or put it another way, just because a home loan is “underwater” — meaning its value is lower than today's current market price — why should a responsible person whine about it and walk away? Why not service this loan for the longer term and wait for prices to improve? That's called personal responsibility.
Bloomberg financial columnist Caroline Baum argues that lower home prices are the key to solving the housing problem. Popular blogger Barry Ritholtz says we need more foreclosures, not fewer, to solve housing. Both are correct.
Even in the foreclosure process, young families can come in and snap up cheap homes. This is a great boon to the new generation.
And take a look at places like California, Florida, and Las Vegas, where foreclosure activity has been high and prices have fallen the most. What you see is a sharp pickup in home sales, which is steadily clearing away the price-depressing inventory overhang of unsold homes. In other words, market forces work.
Bouncing from pillar to post, the White House has unsuccessfully tried mortgage modifications, foreclosure abatements, and tax credits. None of it has worked. But the price tag so far for these failed government interventions in the housing market is $75 billion and rising.
Applying TARP money to the housing problem — originally meant for banks — is an even greater outrage. TARP should be closed down, now that banks have repaid it, and turned back to taxpayers in the form of government debt reduction.
But the Obama White House rejects market forces. It rejects free-market price adjustments. As a result, it is creating a crazy subversion of normal incentives.
Obamacare — with its unwillingness to put to work true free-market and consumer-choice competition to hold down health costs — will turn out to be a failure. And so will Team Obama's clumsy and clunky attempts to substitute government subsidies for free-market home pricing. The failed government subsidy for housing is a leading indicator. Imagine, putting more and more middle- and upper-end income earners on the government dole.
As America's nanny state grows larger, its economy will grow weaker.
Lawrence Kudlow is an American supply-side economist and television personality. He is the host of CNBC's The Kudlow Report and co-host of The Call. He is also a syndicated columnist and was a former Reagan economic advisor. You can visit his blog, Kudlow's Money Politics.
Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.
Immigration: A Birthright? Maybe Not
by George Will
WASHINGTON — A simple reform would drain some scalding steam from immigration arguments that may soon again be at a roiling boil. It would bring the interpretation of the 14th Amendment into conformity with what the authors of its text intended, and with common sense, thereby removing an incentive for illegal immigration.
A parent from a poor country, writes professor Lino Graglia of the University of Texas law school, “can hardly do more for a child than make him or her an American citizen, entitled to all the advantages of the American welfare state.” Therefore, “It is difficult to imagine a more irrational and self-defeating legal system than one which makes unauthorized entry into this country a criminal offense and simultaneously provides perhaps the greatest possible inducement to illegal entry.”
Writing in the Texas Review of Law and Politics, Graglia says this irrationality is rooted in a misunderstanding of the phrase “subject to the jurisdiction thereof.” What was this intended or understood to mean by those who wrote it in 1866 and ratified it in 1868? The authors and ratifiers could not have intended birthright citizenship for illegal immigrants because in 1868 there were and never had been any illegal immigrants because no law ever had restricted immigration.
If those who wrote and ratified the 14th Amendment had imagined laws restricting immigration — and had anticipated huge waves of illegal immigration — is it reasonable to presume they would have wanted to provide the reward of citizenship to the children of the violators of those laws? Surely not.
The Civil Rights Act of 1866 begins with language from which the 14th Amendment's Citizenship Clause is derived: “All persons born in the United States, and not subject to any foreign power, excluding Indians not taxed, are hereby declared to be citizens of the United States.” (Emphasis added.) The explicit exclusion of Indians from birthright citizenship was not repeated in the 14th Amendment because it was considered unnecessary. Although Indians were at least partially subject to U.S. jurisdiction, they owed allegiance to their tribes, not the United States. This reasoning — divided allegiance — applies equally to exclude the children of resident aliens, legal as well as illegal, from birthright citizenship. Indeed, today's regulations issued by the departments of Homeland Security and Justice stipulate:
“A person born in the United States to a foreign diplomatic officer accredited to the United States, as a matter of international law, is not subject to the jurisdiction of the United States. That person is not a United States citizen under the 14th Amendment.”
Sen. Lyman Trumbull of Illinois was, Graglia writes, one of two “principal authors of the citizenship clauses in [the] 1866 act and the 14th Amendment.” He said that “subject to the jurisdiction of the United States” meant subject to its “complete” jurisdiction, meaning “not owing allegiance to anybody else.” Hence children whose Indian parents had tribal allegiances were excluded from birthright citizenship.
Appropriately, in 1884 the Supreme Court held that children born to Indian parents were not born “subject to” U.S. jurisdiction because, among other reasons, the person so born could not change his status by his “own will without the action or assent of the United States.” And “no one can become a citizen of a nation without its consent.” Graglia says this decision “seemed to establish” that U.S. citizenship is “a consensual relation, requiring the consent of the United States.” So: “This would clearly settle the question of birthright citizenship for children of illegal aliens. There cannot be a more total or forceful denial of consent to a person's citizenship than to make the source of that person's presence in the nation illegal.”
Congress has heard testimony estimating that more than two-thirds of all births in Los Angeles public hospitals, and more than half of all births in that city, and nearly 10 percent of all births in the nation in recent years, have been to illegal immigrant mothers. Graglia seems to establish that there is no constitutional impediment to Congress ending the granting of birthright citizenship to persons whose presence here is “not only without the government's consent but in violation of its law.”
George Will is a long-time conservative-leaning news analyst for ABC since the early 1980s and was a founding member on the panel of ABC's This Week with David Brinkley in 1981, now titled This Week. Will also has a PhD in politics from Princeton University.
I hope you found the articles above interesting. Clearly, concerns about our out-of-control federal spending and the skyrocketing national debt are gaining momentum in the media. It remains to be seen if this national outcry will have any effect on Obama's spending plans. Actually, I don't honestly believe he and his liberal cronies even care what we think. But that is a topic for another time.
I will be back to our usual format next week. I hope everyone had a great Easter holiday. I sure did!
Very best regards,
Gary D. Halbert
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