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The Lighthouse is the weekly email newsletter of the Independent Institute.
Subscribe now, or browse Back Issues.

Volume 13, Issue 32: August 9, 2011

  1. Debt Deal Dénouement
  2. Defense Secretary’s Rebuke of NATO Fell Short
  3. “Underpants Gnomes” Political Economy
  4. New Blog Posts

1) Debt Deal Dénouement

The U.S. stock market tanked on Monday in the aftermath of Standard & Poor’s lowering its long-term credit rating of the United States—itself a consequence of last week’s debt deal. Superficially, the deal seemed to be a “perfect” political compromise: it split the difference between the White House and congressional Republicans. To be more precise, the Budget Control Act of 2011, as it’s called, would reduce federal spending as a percentage of GDP to the midpoint between the level implied by President Obama’s proposal of last February, and the level implied by the House budget resolution authored by Rep. Paul Ryan (R-WI). Last week’s debt compromise, though in reality far from ideal, may have been the best deal one could have reasonably hoped for in the current political climate. But the result means that federal spending “will still require major changes in Washington, D.C., to truly put the United States federal government’s finances on a genuinely sustainable path,” writes Independent Institute Research Fellow Craig Eyermann.

The debt deal has two parts. The first cuts almost one trillion dollars from the budget over ten years. The second part requires a bipartisan congressional committee to come up with another $1.5 trillion in deficit reductions over ten years. Getting Congress to pass meaningful deficit-reduction measures in the same year as the November 2012 election may be a losing proposition. But if fiscal gridlock ensues, the Budget Control Act will trigger a series of automatic spending cuts in most federal spending programs (the exempt programs include Social Security, Medicaid, veterans benefits, and civil and military pay). Other domestic programs and defense spending would share equally in the spending cuts. Thus, the Budget Control Act ensures that a future budget impasse would offer a silver lining.  As Independent Institute Senior Fellow Ivan Eland writes, “further fiscal deadlock, which seems very possible, would ensure that taxes would not be increased and defense would likely take a larger percentage of cuts than without the stalemate. Thus, continued partisan gridlock may be the best outcome of all.”

What is to be done? Some fiscal conservatives have called for a balanced budget amendment. However, in a symposium of economists convened by Time magazine, Independent Institute Research Fellow Alex Tabarrok argues that a balanced budget amendment is undesirable because it would cut government spending and/or raise taxes when Americans are the most vulnerable--during recessions--and thus would worsen economic hardship and hamper economic growth at the worst times in the business cycle. Tabarrok proposes what he believes is a far better alternative: an unbalanced budget amendment (unBBA). Under this constitutional constraint, the federal government would be required to maintain budget surpluses when the economy is growing and be allowed to run deficits during recession years. “The idea of an unbalanced budget amendment is not new,” Tabarrok writes. “Sweden’s government has been required since 2000 to budget for a 1% surplus over the business cycle. Since implementing their unBBA, Sweden has successfully brought their budget into balance and created a surplus.”

The Virtues of an Unbalanced Budget Amendment, by Alex Tabarrok (Time, 8/4/11)

Let’s Hope for Continued Fiscal Gridlock, by Ivan Eland (8/4/11)

Visualizing the Debt Deal, by Craig Eyermann (MyGovCost.org, 8/2/11)

More by Craig Eyermann at MyGovCost.org

Recarving Rushmore: Ranking the Presidents on Peace, Prosperity, and Liberty, by Ivan Eland

Entrepreneurial Economics: Bright Ideas from the Dismal Science, edited by Alex Tabarrok

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2) Defense Secretary’s Rebuke of NATO Fell Short

In 1951, General Dwight Eisenhower said that if U.S. troops were still stationed in Europe ten years later to protect American allies, then NATO “will have failed.” During a speech last June in Brussels, retiring Defense Secretary Robert Gates took a parting shot at European members of the trans-Atlantic alliance, but he stopped short of calling it a failure. Instead, he urged U.S. allies to step up to the plate, lest the political leadership in Washington decide that the United States should formally withdraw from the alliance.

Independent Institute Senior Fellow Charles V. Peña argues that Gates should have gone further: “The truth is that Gates should not have been telling European members of NATO to get their act together to preserve the alliance; he should have been asking Americans why we’re still part of NATO.”

Peña notes that the American contribution to NATO is disproportionately larger than that of its European counterparts. The United States has a smaller economy than the European Union but spends more on defense. U.S. defense spending amounts to nearly $700 billion (about 5 percent of U.S. GDP), compared to the equivalent of $300 billion that countries of the European Union spend on defense (less than 2 percent of EU GDP). The United States also has 80,000 troops stationed in Europe, even though the Soviet Union is no longer around to threaten a land invasion. Moreover, Peña suggests that although “collective defense” lies at the heart of Article 5 of the NATO charter, the alliance has little to offer the United States in terms of security.

Gates’ NATO Gripes Ignore Biggest Failing, by Charles V. Peña (Antiwar.com, 7/28/11)

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3) “Underpants Gnomes” Political Economy

The outlandish writers of television’s South Park thought of it, but the metaphor applies too often in the real world: Someone comes up with a plan (Phase 1), say, to collect underpants for the purpose of making a handsome profit (Phase 3). The crucial middle step (Phase 2) is filled in hastily with the sketchiest of details or left unspecified—as if a mysterious group of Underpants Gnomes could be relied on to make the initial plan actually serve the stated goal.

As Independent Institute Research Fellow Art Carden sees it, the same folly is ubiquitous in public policy: Phase 1: pass a law; Phase 2: ?; Phase 3: virtue and/or prosperity emerge. Think of the war on drugs, immigration restrictions, or universal healthcare. The gap between Phase 1 and Phase 3—the pesky details of implementation—typically leave a lot to be desired, as if intentions alone were enough to ensure that initial plans serve the desired end.

“This is the political economy of the Underpants Gnomes, though,” Carden writes in a recent column at Forbes.com. “To have a truly useful conversation about policy, we need to focus less on the desirability of what we can imagine in Phase 3 and think harder about what is going on in Phase 2.”

“Underpants Gnomes” Political Economy, by Art Carden (Forbes.com, 7/14/11)

More by Art Carden

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4) New Blog Posts

From The Beacon:

From MyGovCost News & Blog:

Who Won the Debt Debate? The Economy Still Lost
Stephanie Freedman (8/3/11)

Visualizing the Debt Deal
Craig Eyermann (8/2/11)

The Independent Institute’s Spanish-language blog is available here.

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