Progressives and the Economy

Look at the blog posts listed at your right for May and earlier months. They paint a picture of an economy not working. Our leaders sit atop a government structure that doesn’t know how to create jobs. The Democrats’ only formula—spend government money to stimulate economic growth the way Roosevelt spent us out of an 11-year depression during World War II—has failed. Now the progressives’ bag of tricks is empty. Time for Republicans to get government out of the way. Time to turn the economy over to entrepreneurs who do know job creation.

Or so you’d think. But progressives are in their own world.
Start with “Salon’s”Joan Walsh, who informs us:

Former Biden economic advisor Jared Bernstein (picture) wrote a really great piece about why he left the White House: It's pro-Obama, it's compassionate, it's fair-minded and it's also critical.

OK. So let’s hear what brother Bernstein has to say that Walsh considers so “really great”:

as the 2012 election season gears up, we are poised to have a fundamental debate about the size and role of the federal government. But absent straight talk and plain, understandable facts from both sides of the argument—about the costs and benefits engendered by this choice—it will be impossible for voters to make an informed choice.

Let me be clear about where I stand. I view the conservative agenda right now as trying to implement a large shift in who bears the risk of those events in our personal and economic lives that are inadequately handled by private markets. In my view, to get this wrong means significant disinvestment in public goods from education to infrastructure, diminished health and retirement security, more booms and busts—a move from “we’re in this together” to “you’re on your own.”

In 1935, in the midst of the Great Depression when most of the country was poor, unemployment was at 21%, and people were truly desperate for jobs, Roosevelt created the original entitlement program, social security, whereby workers would pay for help they receive in retirement with payroll deductions when they are healthy and able. Social security, not welfare, not aimed at the poor, paid for by the worker, covering every worker, wildly popular.

That was then. Now Bernstein says conservatives want to rip away the safety net that protects the casualties of the free enterprise system, presumably because conservatives say we have to cut government expenditures that rose from 20% to 25% of GDP since 2008 back to the pre-Obama era's 20%. Bernstein also says such cuts will hurt education, infrastructure, health, and retirement security, and make the economy’s ups and downs even more rocky.

I say Bernstein’s “really great” analysis is wrong. Even in its current shape, the American economy can afford to care for the truly needy. Bernstein isn’t focused on the poor; he is worried about changes to social security, Medicare, and Medicaid that affect the non-poor. That’s where entitlement reform will take place. Republicans are asking why continue to pay for the well-off to have full social security and Medicare benefits, and why should the non-poor be covered by Medicaid, a program meant for the poor? What made sense in 1935, when the whole country was poor doesn’t work out in 2011, when most are not poor.

We have documented how education doesn’t seem to benefit from money. Education needs reforms that don’t cost money, or that re-directed money can pay for. Similarly, there are more efficient ways to pay for health and infrastructure needs that don’t depend upon government bureaucrats, or that don’t kowtow to the plaintiffs bar by blocking tort reform.

As for the boom-bust economic cycle, Keynesian government stimulation of the economy didn’t work in 1933-1940 (see Amity Shlaes), and hasn’t worked in 2009-11. What works is supporting business efforts to invest and create jobs, taking advantage of the lower costs that come with the bottom of the business cycle, while caring for the casualties of the bust. When business finds government at its back instead of standing in front saying “Stop!”, it sets out to make money, and we all gain from the resulting economic growth.

Or was Adam Smith wrong?

China Fail?

"[the Chinese] will have to align their political reality with what has been happening in the last 20 years under the impact of reform. . . the issue of reform, of political reform, will have to be substantially up to the next group of leaders."

--Henry Kissinger, to the Wall Street Journal

And maybe not just political reform. Economic reform as well.

John Berthelsen of the “Asian Sentinel” writes about a “provocative report” by political scientist John Lee of the Center for Independent Studies of Sydney. Lee prepared his report for the Hong Kong-based independent economic research firm Asianomics, and titled it "China Fail."

For me, the report’s most remarkable conclusion is that the money-losing state-owned enterprises (SOEs), seemingly discarded in the 1990s for being a huge drag on the economy, in fact have been growing in number and economic share. The successful export sector, employing 150 million people, attracts far less of the domestically funded fixed-investment that has underpinned 40% of China’s growth for two decades. Lee doesn’t believe the SOEs are any more efficient today than they were in the 30 previous years, when they paralyzed the Chinese economy.

Significantly, Lee links the government’s continued support of SOEs directly to the 1989 Tiananmen massacre, which coincided with the collapse of communism in Russia and Eastern Europe. Lee posits the Chinese leadership decided that European Communists lost power because the interests of the political elite and the economic elite had diverged, and China’s leaders vowed that would never happen in China.

The Communists created their own elite, ensuring the Communist Party (CCP) held an economic, professional and social monopoly. Lee’s report says, "the party has not just co-opted but created the country's middle class elites." Today’s established middle classes—the group foreigners engage with most frequently or exclusively—have become the “strongest supporters of the CCP. Of the 85 million CCP members, over four-fifths are China's elites."

According to the “Asian Sentinel” article that quoted Lee's report,

The numbers of bureaucrats on the state payroll jumped from fewer than 20 million in the 1980s to 46 million by 1994 to somewhere between 50 and 55 million today. A vast fleet of 2.5 million state cars, paid from the public purse, is available to them. Local officials have spent an estimated $80 billion each year on overseas trips, banquets, travel and other entertainment. In addition, the government spends about $200 billion on health care for bureaucrats, compared with only $50 billion to $60 billion spent on rural health care for its 400 million rural citizens.

The report documents distortions and difficulties springing from elite Party rule of the economy:

• In the early 1980s, the government encouraged farmers to make their own land use decisions and sell produce at market prices after meeting state quotas, and total factor productivity in agriculture doubled over the next 10 years. Farming has since stagnated.

• Chinese private-sector firms struggle with ‘'credit and capital constraints,” and even very successful private small and medium enterprises tend to flat-line at 30 employees, since that’s the limit of informal finance (savings of friends and family).

• China’s state sector now owns over two-thirds of the country’s fixed assets, a direct reverse of what occurred in China during 1979-89, when the majority of new fixed assets went to the private sector.

• Even though SOEs produce only 25-33% of all output, they receive more than 75% of capital, well over 95% of the post-global financial crisis stimulus funds in 2008-2009, and 85% of the funds in 2010.

• Most SOEs don't make any money. Sinopec, China Mobile and China National Petroleum make enormous near-monopoly profits; 80% of SOE profit comes from less than a dozen of the 150 major and 120,000 smaller SOEs.

• Locally-managed SOEs are “even more abysmal," with 19% of such state-controlled enterprises unprofitable in 1978, 40% in 1997, and 51% in 2006.

• At least 40% of bank loans to local SOEs are extended on a “policy” rather than “commercial” basis at artificially low interest rates, meaning banks are performing political, not economic, tasks.

• Since 1995, bank profits have come from massive loan growth, combined with increasing spreads between the lending rate and the returns on deposits, with spreads now accounting for 80-90% of overall profits.

• The rescue of banks between 1990 and 2005 cost perhaps $300 billion as junk assets were transferred from the banks to asset management concerns. Few, if any of the assets were worth anything.

• Transferring wealth from depositors to banks reduced the private-consumption share of GDP from 45% in the late 1990s to 35% now. Bank nonperforming loans may range from 40% of annual GDP to more than 100%.

Lee believes that China’s technocrats know how to fix the country’s economic problems. The barriers to reform are political, with leaders already exhibiting policy paralysis.

There are additional signs of strain in the current Chinese economic system. According to an AP report:

When millions of workers didn't return to their southern China factory jobs after Lunar New Year holidays, a turning point was reached for foreign manufacturers scraping by with slim profit margins. . . 30 to 40% of migrant workers didn't return to their factory jobs in Guangdong province's Pearl River Delta manufacturing heartland after the annual Lunar New Year holiday in February. . . Typically the proportion is 10 to 15%. That was despite Guangdong authorities raising minimum wages by up to 20% in March.

Of course, as Ben Omarsson, “guangzhou-information.com” notes, the failure of migrant workers to return to their previous jobs is “also a sign of improved economy in inland China, and better job opportunities for people in smaller, less developed cities.”

Related to rising workers wages is the linked problem of Chinese inflation. CNN Money‘s Colin Barr quotes Boston assets manager Jeremy Grantham saying China already “accounts for more than half the world's consumption of cement, and nearly half its use of iron, coal, lead, zinc, aluminum, and (oink oink) pigs.” Such a voracious demand relentlessly pushes up prices.

When the subject is China, there is always much to cause observers concern. Yet the country’s amazing growth continues, now in its fourth decade.

Jobless Recovery

USA Today notes the shocking absence of jobs:

The nation has 5% fewer jobs today — a loss of 7 million — than it did when the recession began in December 2007. That is by far the worst performance of job generation following any of the dozen recessions since the 1930s [see graph]. In the past, the economy recovered lost jobs 13 months on average after a recession. If this were a typical recovery, nearly 10 million more people would be working today than when the recession officially ended in June 2009.

In the Atlantic, associate editor Derek Thompson writes:

what kept unemployment in double digits throughout 2010? Job openings, which had fallen more than 50% from 2007, rebounded moderately. But hires, which had fallen more than 20%, didn't recover [see graph]. . . the labor economy froze. [We have] nonexistent efforts to fix a static unemployment problem.

Look at the graph’s purple line--the failure to boost hires! A dramatic picture of no job growth.

Two graphs. Two legacy media articles. Same depressing message.

It’s growth, stupid.

"Growth matters. It’s the whole ballgame. Growth creates mass prosperity. Growth gives hope. Growth pays for mistakes. From 1946 to 2000, the American economy averaged 3.5% growth per year. At that level, all of our national problems and worries. . . were manageable. From 2001 to 2010, the American economy slowed to 1.7% annual growth. All of our problems — deficits, debts, unemployment, sagging confidence – got worse."

--Rich Karlgaard, Forbes publisher

Alex Pollock, writing in the Wall Street Journal, sums up this century’s housing collapse, the source of our slow-growth economy:

As an old banker told me long ago, "Just remember this, young man: Assets shrink—liabilities never shrink!"

Along with Karlgaard, Pollock believes 2000, the year the “dot.com” bubble burst, represented a major turning point for our economy. Faced with an industrial recession and deflationary pressure from past overinvestment, Fed chair Alan Greenspan fostered a housing boom to counter the 1990s equity bubble. Pollock called this new, government-engineered boom the “Greenspan Gamble.”

Low interest rates drove housing sales that inflated from 1999 to 2006, creating a double bubble in housing and commercial real estate. The bubbles ran leverage and asset prices up to an unsustainable 90% increase, with housing peaking in the second quarter of 2006, and commercial real estate in the fourth quarter of 2007.

The bust that followed brought a national price drop of 32% from the peak for housing, and 42% drop from the peak for commercial real estate—a greater fall because commercial real estate lacks the large government programs and subsidies supporting home prices. This represented a combined drop in market values of over $8 trillion.

Those still suffering include delinquent borrowers, banks, domestic and foreign investors, plus Fannie Mae and Freddie Mac, government institutions Pollock calls “hopelessly insolvent with their losses paid for by taxpayers,” yet still funding the majority of new mortgage loans even up to $729,750.

Pollock, suggesting we don’t learn from our mistakes, says the (current Fed chair Ben) “Bernanke Gamble” now is pushing up stock and bond buying with zero short-term interest rates to offset the huge real estate losses. The Fed's latest actions seem to be son of the “Greenspan Gamble.” Bernanke’s purchase of about $1 trillion in mortgage debt has made the Fed, in Pollock’s words “the largest savings and loan in the world.”

I have been a believer (here and here) in Fed actions since 2000 to stimulate the economy, but now fear this market interference by two successive nominally-Republican Fed chairs is in the same pattern as the Obama administration’s failed effort to stimulate the economy through unprecedentedly massive (in peacetime) deficit spending.

As both Pollock and Karlgaard believe, we do better to leave growth to the private sector. Karlgaard has some specific growth-generating actions for policymakers:

– Strong and stable dollar

– Get federal share of GDP back under 20% (from 25% today)

– Simpler, flatter tax rates

– Lower corporate tax rates, in line with global competition

– Simpler, transparent regulation

– Pro-energy policy

– Immigration policy favoring skilled immigrants

– Stop war against business (e.g., Obama’s war on Boeing)

– Ban public employee unions

– Education reform (must break up teachers’ unions first)

– Patent reform (which currently favors large companies over entrepreneurs)

I would boil down Karlgaard’s list to:

– Drastically cut federal spending (get share of GDP back under 20%)

- Reform taxes (Simpler, flatter tax rates; lower corporate tax rates)

- Reduce anti-business actions (Simpler, transparent regulation; pro-energy policy; stop war against business, Boeing)

– Beat public employee unions (including teachers’ unions)

– Reform immigration (favor skilled immigrants)

Not so complicated. Run government to support business and entrepreneurs, reduce government’s size and clout, and put public unions, the enemy of economic growth, in their proper place.

Immigration reform is vital, and not widely accepted for what it is—central to America’s economic future.

Wall Street Falters

Stocks fell for a third straight session after housing and industrial production data added to fears of further economic weakness. Housing starts dropped 10.6% to an annual rate of 523,000 in April. Economists had expected a rise to 575,000.

U.S. industrial production was flat in April; a surprise to economists, who had expected a 0.3% gain. Adding to a sense of weakness, industrial production in February was revised to a 0.3% drop from the previous estimate of a 0.1% increase, and output in March was trimmed from a 0.8% to a 0.7% gain.

The Dow closed today at 12,480, the S&P 500 at 1,339, and the NASDAQ at 2,783. The FOX Index is now down to +792 (chart), back below +1,000, and below its early May peak of +1,335 (the Index is less than three years old). Still, the Index remains “healthy,” defined as above 15,800, a total formed from adding a Dow of 12,000, an S&P 500 of 1,300, and a NASDAQ of 2,500.

No jobs, no jobs, no jobs.

As new claims for unemployment once again exceeded 400,000, the level economists consider too high to sustain job growth, the financial press more positively reported the applications “fell by 44,000 last week to 434,000, partly reversing a large spike earlier in April.”

Actually, the news is all bad. The claims figure exceeded the 428,000 applications experts had anticipated. The previous week’s figure was revised upward to 478,000. The average of new claims over the past four weeks rose by 4,500 to 436,750, the highest level since November. And the four-week average is considered the more accurate gauge, because it lessens week-to-week volatility.

Two different commentators spoke in the starkest possible terms about how truly awful the American unemployment picture looks today. Mohamed A. El-Erian (picture) is CEO of the major bond investment firm PIMCO. He wrote:

facts speak to an unpleasant and unusual reality for the United States. The country now has an unemployment problem that is large in magnitude and increasingly structural in nature. The consequences are multifaceted, involving immediate personal anguish, rising social and political tensions, economic losses, and budgetary pressures. . . High and intractable unemployment has serious negative long-term consequences that threaten to become exponentially worse. This is a crisis. [emphasis added]

And the New York Times’ David Brooks, appropriately zeroing in on the more serious male unemployment problem, similarly warned:

One-fifth of all men in their prime working ages are not getting up and going to work. . . There are probably more idle men now than at any time since the Great Depression, and this time the problem is mostly structural, not cyclical. These men will find it hard to attract spouses. Many will pick up habits that have a corrosive cultural influence on those around them. The country will not benefit from their potential abilities. This is a big problem. [emphasis added]

Both El-Erian and Brooks recommend job training and other government-run programs. Better the choices of Edward Lazear, Bush’s last chairman of the Council of Economic Advisers, currently a professor at Stanford Business School, and a Hoover Institution fellow.

The prescription for the American labor market is simple: low taxes on capital investment, avoidance of excessively burdensome regulation, and open markets here and abroad. We must create a climate in which investment is profitable, productivity is rising, and employers find it profitable to increase their hiring rate.

The Status Quo Party

Quote without comment:

"[The] poverty of today’s liberal imagination [is] an inability to think beyond the straight-line continuation of programs from the second and third quarters of the last century. It is odd that “progressives,” as liberals now wish to be called, have such a constricted notion of the possibilities of progress.

"The regnant ideology within the Obama administration and among congressional Democrats is reactionary liberalism, the conviction that whatever government programs exist should forever exist because they always have existed. That is, as baby boomers, in their narcissism — or perhaps solipsism; or both — understand 'always.'”

--George Will, Washington Post

Taxes: Who really pays.

According to the Tax Foundation, in calendar year 2008, the top-earning 5% of taxpayers (adjusted gross income—AGI—over $159,619) earned 34.7% of the nation's AGI, but paid 58.7% of federal individual income taxes. The top 1% of tax returns earned 20.0% of AGI and paid 38.0% of all federal individual income taxes.

That means the “next 4%” earned 14.7% of AGI and paid 20.7% of taxes.

The Congressional Budget Office reports the richest 20% of taxpayers shoulder a record 86% of the federal income tax burden, which means the top 20%'s “bottom 15%” must be paying 27% of income taxes. The Census Bureau defines the top 20% of households as those earning over $100,000, while the Internal Revenue Service says the top 1% makes over $380,000. Please see the chart below, which graphically divides up among the top 1%, the next 4%, and the last 15% the income and income tax burden of the top quintile (20%) of American households.


The chart provides us a clearer picture of what’s going on at the top. The top 1% of households we previously identified as rich enough, at $400,000 annually and higher, to live with a progressive tax system, even though some are giving up small business profits they could invest more wisely than the government.

Obama and his people have claimed a second-level group of taxpayers, those earning between $200,000 (individual, $250,000 family) and $400,000, make up only 1% of households (Obama’s “only one out of 50 households will pay higher taxes" equals 2%; take away the top 1%, and you are left with 1%). In fact, the bottom group of Obama's "top 2%" is closer to 4%, since the "next 4%" cut-off income of $160,000 in 2008 today just about reaches Obama's rich people floor of $200,000. This 4% group, at the bottom of the wealthy, will be unhappy to have their taxes raised, and should by now be souring on Obama’s “soak the rich” rhetoric.

The top quintile’s final 15% (not the 18% of the top quintile Obama suggested would escape higher taxes), those between $100,000 and $200,000, is the larger group Obama is trying to buy off with his “more public services at no cost” strategy. It’s crass politics, as we saw earlier, since one simply can’t get enough from upping taxes on the top 5% to close the deficit and do all Obama wants to do.

Obama’s priorities are 1) get re-elected in 2012, 2) raise taxes on both the top 5% and the bottom 95% in 2013, when he will no longer have to run again. No other strategy makes sense for the leader of the big government party, a man thus far unable to cut a budget.

And much of Obama’s increased taxes will have to come from the “next” 15% he tries so hard to woo. After all, the top 20% have 50% of the income, and 85% of the wealth. It’s why they already pay 86% of income taxes.

The top 20% of households includes four times as many workers as the bottom 20%, and nearly six times as many full-time, year-round workers.

The top 20% of households also form the largest quintile in population, containing 78.4 million people. That means 1/4th of America is in the top quintile. And as we learned earlier, they make up 26% of the electorate.

One hopes these “best” are bright enough to realize how directly runaway government spending will hurt them.

Extended note: To arrive at the actual number of people in the top 20% of households, we looked at the middle quintile—the median—of households, with a population of 61,637,000 (23,436,000 households mulitiplied by the average household size of 2.63 =). In that quintile, 68.7% of the households are families with two or more people; the rest of the households are single people. In the top quintile, the ratio of families to single people is significantly higher; 87.4% of the households are families. That means the ratio of families in the top 20% households to families in the median household population is 1.27 to 1. Applying that ratio to the median quintile population of 61,637,000, we find the top quintile’s population is roughly 78,400,000, which works out to 25.5% of the U.S. population.

“Tax the other guy!!”

Where is the money and power in America today? National Review’s Reihan Salam thinks he has found it in our upper middle class:


• if there is a social group that has been a barrier to good public policy, one can make a strong case that it isn’t the ultra-rich but the upper middle class, a group . . . earning between $100,000 and $250,000.

• [True,] Americans in the top 0.01% of the income distribution have [great] political influence . . . channeled through campaign donations and . . . charitable giving. . . to nonprofits devoted to shaping the ideological environment. . . the Koch brothers [on one side, and on the other,] the Ford Foundation, Atlantic Philanthropies, the Soros Foundations, elite research universities, and . . . other[s] devoted [to expanding] the welfare state.

• [But] the top 0.01% has less collective political weight than the upper middle class, [because] there are more voters in the upper middle class. These voters [are] active as volunteers and as small donors . . . and . . . heavily concentrated in professions — media, the upper echelons of the public sector, higher education — that further magnify their influence. . . Republicans in heavily Republican states tend to win elections with . . . middle-class and upper-income voters, while Democrats in heavily Democratic states tend to win elections with a coalition [including upper-middle-class] voters.

• Voters in households earning more than $100,000 constituted 26% of the 2008 electorate. [They went for Obama.] In the 2010 House elections, in contrast, voters in over-$200,000 households chose Republicans over Democrats by . . . 64% to 34%, while $100,000 to $200,000 households favored Republicans by . . . 56% to 43%. The president’s political advisers are keenly aware . . . Democrats need to improve their performance with these voters or face defeat in 2012.

• Obama [has elevated] a $250,000 annual household income to an almost mythical status. . . Given that 49 out of 50 households earned less than $250,000 [in 2008], there is no question . . . the cutoff number . . . was politically shrewd. . . only one out of 50 households would pay for all [Obama’s] new spending and for reducing the deficits.

• [Yet] achieving a budget deficit of [“only”] 3% of GDP by 2020 through tax increases on over-$250,000s would require doubling their rates, kicking the top rate to 76.8%. Suffice it to say, marginal tax rates at these levels [won’t work. A better] strategy would involve curbing tax [deductions] for all households, a policy Rep. Paul Ryan has endorsed. But that would cost the upper middle class, and so the president [won’t do it].

• Note. . . that the mortgage-interest deduction, which will cost $637 billion over the next five years, overwhelmingly benefits affluent households at a staggering cost to the Treasury. [Obama] preserve[s] this tax break as a gift for households earning between $100,000 and $250,000, since under-$100,000 households are far less likely to itemize their taxes.

• Rather than persuade voters to embrace . . . higher taxes for more public services, the Obama campaign promise[s] more public services at no cost. . . But if one believes, as the president emphatically believes, that we need to dramatically expand the scope of government, it makes [no] sense to argue that households earning between $100,000 and $250,000 should be completely exempt from tax increases.

• Very bluntly, [Obama doesn’t protect] these upper-middle-class households out of a deep commitment to social justice. Instead, [he’s] protecting . . . a class with outsize political power and interests.

Unemployment: Obama’s Re-elect Targets

The Friday monthly unemployment report top-line number was 244,000 jobs created, a solid figure that suggests economic recovery is underway. The 244,000 number, however, wasn’t the whole story. Other results were weaker, with the household survey, a separate poll that is an actual head count, indicating job creation barely kept pace with labor force expansion.

I believe two numbers are going to measure Obama’s job creation success when the November 2012 election arrives. One is the unemployment rate, which Obama must bring down to 7.8%, the percentage during his first month in office. Here, the president faces a challenge, because as the job creation picture improves, more people enter the workforce, making it harder to lower the unemployment rate. It rose from 8.8% to 9.0% this month.

Another number voters should watch is total jobs created. In the separate establishment survey, the Labor Department tells us Bush left office with 133,563,000 people working. Will Obama get America back to that number? It’s a fixed target. To date, he has presided over a net job loss of 2,535,000.

The chart below summarizes Obama’s employment-related targets for November 2012.

Honoring thy predecessor: to Osama’s compound, to the moon.

“[Enhanced interrogation techniques] did not advance our war and counter-terrorism efforts - they undermined them, and that is why I ended them once and for all.”

--President Obama, 5.21.09

Well, maybe enhanced interrogation did help, after all. Intelligence sources report that two terrorists subject to enhanced interrogation, Khalid Sheik Mohammad and Abu Faraj al Libbi, in effect confirmed the identity of the courier who led the CIA to Osama bin Laden’s Pakistan safehouse. They did so when both strongly denied knowing the courier, after lower-level al Qaeda terrorists had already identified him as very close to Osama. It took six more years, but the trail began with Bush’s enhanced interrogation. We are rid of Osama thanks to the actions of two administrations, and the use of techniques by the first later renounced by the second.

Obama has acknowledged that Osama’s death completes a task begun under his predecessor, but he is unlikely to admit—ever—that Bush was right to have authorized the enhanced interrogation that helped lead to Osama’s death. Let’s be clear. Obama got Osama, and deserves the major credit for doing so. In that sense, the story of how we got Osama is not comparable to the sad story of how President Nixon, following our successful moon landing in 1969, completely ignored President Kennedy’s 1961 pledge that “this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the Moon and returning him safely to Earth." Parallels between Kennedy/Nixon and Bush/Obama, but not the same.

Government debt, government waste.

We earlier gave Ronald Reagan credit for understanding how to grow the economy through lower taxes. Reagan wasn’t so good, however, at actually reducing the deficit. Congress resisted many of his spending cuts. And today, because of big spending and low revenue, we have our largest deficits and highest debt level ever. We must turn our economy around.

Republicans advocate cutting back on government spending, controlling entitlement growth, and leaving more money with taxpayers, who will invest, spend, and generate growth. Stephen Moore, in the Wall Street Journal, peels back the cover that hides what’s really happening with government:

Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government. . . Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees. . .

Over the period 1970-2005, school spending per pupil, adjusted for inflation, doubled, while standardized achievement test scores were flat. Over roughly that same time period, public-school employment doubled per student. . . We gauge school performance not by outputs, but by inputs. If quality falls, we say we didn't pay teachers enough or we need smaller class sizes or newer schools. If education had undergone the same productivity revolution that manufacturing has, we would have half as many educators, smaller school budgets, and higher graduation rates and test scores.

Moore points to surveys of college graduates showing our top minds want to work for the government, because only government agencies are hiring, and because they love government’s near lifetime security.

This can’t continue. Adam B. Schaeffer, with the Cato Institute, found that public education is even more inefficient than we thought. It’s because budgets bury some of the money going to schools:

Although public schools are usually the biggest item in state and local budgets, spending figures provided by public school officials . . . for the nation's five largest metro areas and the District of Columbia. . . on average, [had levels of] per-pupil spending . . . 44% higher than officially reported. . .The gap between real and reported per-pupil spending ranges from a low of 23% in the Chicago area to a high of 90% in the Los Angeles metro region. To put public school spending in perspective. . . in the areas studied, public schools are spending 93% more [per pupil] than the estimated median private school.

There is tremendous waste in government as a whole, in public education in particular, and also within our welfare bureaucracy. Peter Ferrara is director of policy for the Carleson Center for Public Policy, and a senior fellow at the conservative Heartland Institute. Ferrara’s research shows that the cost of the 185 federal means tested welfare programs for 2010 for the federal government alone is nearly $700 billion, up a third just since 2008. And when one adds in state spending, total welfare spending for 2010 nearly reaches $900 billion, up 24.3% since 2008. But here’s Ferrara’s shocker:

by 2008 [not 2010] total welfare spending already amounted to $16,800 per person in poverty, 4 times as much as the Census Bureau estimated was necessary to bring all of the poor up to the poverty level, eliminating all poverty in America. That would be $50,400 per poor family of three. Indeed, Charles Murray wrote a whole book, In Our Hands, A Plan to Replace America’s Welfare State explaining that we already spend far more than enough to completely eliminate all poverty in America.

The soaring welfare spending since 2008 is not a temporary increase reflecting the recession, as it is not projected to decline after the economy recovers. By 2013, total annual welfare spending will have grown still more, to nearly $1 trillion. Over the 10-year period from 2009 to 2018, federal and state welfare spending will total $10.3 trillion.

All this money. All this wasted money, since public education doesn’t work, since we have serious structural unemployment, since in spite of the military’s skill in combating terrorists in Iraq and killing Osama bin Laden in Pakistan, government at home seems inefficient and ineffective.

Tough Enough

“Obama 1, Osama 0” proclaimed a sign at the Ground Zero celebrations last night, shortly after the world learned Osama bin Laden was dead. Victory indeed. As David Paul Kuhn of “RealClearPolitics” wrote, “The nation has experienced nothing like this moment since V-J Day.”

Since 2008, we have wondered whether Obama would side with the Democratic Party’s foreign policy realists who know the U.S. under certain circumstances must use force and kill people, or with the anti-war left, so opposed to Iraq, unhinged by Bush’s willingness to push the constitutional envelope to get needed intelligence, and increasingly alarmed about Afghanistan. Obama seemingly moves back and forth between the two groups, his heart with the left, his head knowing voters want a strong president.

Now Obama has a spectacular foreign policy victory, and at the cost of zero American lives. In one stroke, he’s taken “foreign policy weakness” off the table. He’s the guy who got Osama, something John Kerry could only hope for, something Bush’s team of tough guys could not accomplish in seven plus years.

In one stroke, Obama has freed himself to sustain the Iraqi drawdown, to begin leaving Afghanistan, and to tolerate stalemate in our much less significant Libyan involvement. He gets victory. And he gets the “soft” foreign policy he prefers. If Bashar Assad falls in Syria, so much the better.

Obama now even has a shining example of government working, an example he badly needs at a time our bureaucrats seem so incapable of managing the economy. "Obama 1, Obama’s collective enemies 0."