Economics With A Face

The War in Iraq: If Bush loses the election tomorrow, the deciding factor may very well be public opposition to the war in Iraq. Using the military preemptively is a contentious issue to say the least and very worthy of debate. My problem with Kerry and the Democrats is I don't see them taking a principled stance against the war.

To start off with, I personally believe that if 550 votes would have swung the other way in Florida in 2000, we still would be in Iraq today. Sound ridiculous? Gore himself campaigned on the importance of removing Saddam from power and it's not that farfetched to think that after 9/11 he might follow-up on his promise in the name of U.S. security. In this parallel universe we would currently have Republicans complaining that Gore didn't have enough troops while Democrats would be defending the war effort in hopes to get Gore reelected. Looking at it in this context one realizes that much of the debate today is really about political gain, not policy decisions.

But back to reality. Gore didn't get elected and Bush did make the decision to invade Iraq. The debate today focuses on the existence of WMDs and whether or not we had a proper coalition. My problem is that I do not believe this was the true thrust behind invading Iraq. In my opinion, the Bush Administration knew full well that countries such as Iran and North Korea posed more serious threats than Iraq in its previous state. Iran is clearly a larger state sponsor of terrorism than Saddam ever was. In terms of WMDs, you have to ask yourself, why is it that a country with oil so readily accessible takes such an interest in nuclear power?

Why then did we go after Iraq first?

First, there was no need to sell Saddam Hussein as a bad guy to the American public for we already knew all about him. The public was already convinced Saddam was a psychopath at the helm of an oil rich country. It doesn't take a genius to realize that removing him from power and in his place leaving a democratic government of free individuals would be a good thing for not only the people of Iraq, but for the safety of the U.S. and the world as a whole. Secondly, I believe this administration felt that a free-Iraq was a way to deal with Iran without firing a shot. They believe in the domino theory with regards to freedom, a point Bush has stressed throughout the campaign.

Obviously these positions are debatable. I for one believe the military should be used as a defense against an attack on our country or to thwart an eminent threat. And of course you don’t just snap your fingers and presto… a democracy appears that respects individual rights.

These are issues that need to be debated, but where does Senator Kerry stand? I couldn't tell you.

Kerry is now against the war in Iraq as he feels the President rushed to war without a strong coalition and "without a plan to win the peace". I’m still trying to figure what that means. It’s all the more confusing though when you realize Kerry supported the war in the Balkans even though the UN Security Council wouldn't give it a seal of approval. More recently Kerry criticized Bush for not sending more troops to Haiti. Bush to his credit defends his decision to go into Iraq on the basis of national security. No such claim can be made for the Balkans or Haiti so the question remains unanswered: By what standard would Kerry send our troops into harms way? He hasn’t answered that question.

What I don't believe is the Republican claim that a Kerry administration will be a disaster in terms of our security. But if you plan on voting for Kerry on the basis that war is such a serious issue that our military should be used as a last resort, to put it plainly, you have the wrong candidate.

Social Security: No one denies that Social Security is going bankrupt except politicians running for office. The country would need an extra $11 trillion dollars today in order to make up for the difference between what Social Security has promised to pay out in bennefits and what it will take in through taxation. To put that into perspective that is nearly three times as large as our national debt. Luckily for today's politicians these unfunded liabilities are allowed to be kept "off balance sheet" and are not reported in the federal budget. Yeah... kinda like Enron if you were wondering.

The reason we are in this mess is that the money young workers are currently paying into the system is not being saved. It is immediately getting paid out to current retirees. Any excess tax revenues are put into government bonds. Unfortunately when the government buys a bond from itself there is no real savings going on. It is for this reason that you will hear that the Social Security Trust Fund is full of IOUs that the government has written to itself.

If a private business were to set up such an operation it would be called a ponzi scheme and the CEO would end up in jail. Politicians, for some reason, don't want to hold themselves up to the same standard. Go figure.

President Clinton laid out the available options years back when he said we had to make a choice. I'll paraphrase but in essence he said we can raise taxes, cut benefits, or allow younger workers to invest a portion of their taxes in private accounts. The final option allows these younger workers to rely upon their own savings when it comes time to retire, not on the future tax payments of their children.

What is Kerry’s response to this looming disaster? He’s stated he won’t raise taxes, he won’t cut benefits, nor will he privatize in any way the current system. What that means is he’ll leave the system as is for someone else to deal with. During the next four years trillions more of unfunded liabilities will be run up by the government, making it all the more difficult to solve the problem in the long run.

Bush to his credit has addressed this third rail of American politics and has promised to tackle it in his second term. A current bill sitting in Congress would allow workers to invest 10 percentage points of their payroll taxes, applying to the first $10,000 of income, in a private account. Thereafter the rate would drop to 5 percentage points. What that would mean is that even someone making as little as $10,000 a year would now have $1000 in a 401K type account every year. It is my belief that once this would be in place it would change the landscape of American politics permanently.

Can you imagine if Kerry was campaigning on the premise that people shouldn’t be allowed to invest in their own 401Ks, and that the government should own these accounts so people don’t gamble their savings away on the stock market? Additionally the money currently in 401ks would be liquidated and paid out to today’s senior citizens, many of whom are in fact very wealthy. This election would have been over before it started. Now imagine that if every worker today, instead of seeing hundreds of dollars taken out of their pay checks for FICA, instead saw this money being placed in their own private account. As I said there would be no turning back.

For some more reading see here.

Trade & Outsourcing: Kerry had a strong free trade voting record until he started running for Senate. Now he betrayed this record in order to shore up union support. Yes, there is a good chance that, like Clinton, Kerry for the most part would promote free trade and help us down the road to a more integrated global economy. Still it’s hard to support a candidate that runs a campaign based on the fact that Americans have some sort of rights that the rest of the world’s citizens do not.

For more see here.

Jobs, the Economy, & Taxes: The real benefit of Bush's tax cuts was the leveling off of the playing field in term of how corporations distribute their earnings. Many have written this off as a tax cut for the rich but it clearly benefits the economy to have companies making decisions on a basis of what’s best for business, not what’s best for tax purposes.

Here are two charts that show some of the effects. The first chart is a graph of annualized GDP growth. I’ve included the last two quarters of the Clinton Administration just to point out that the first quarter of negative growth did not come on Bush’s watch. The columns turn red after his tax cuts were fully implemented. As you will notice we’ve had 6 consecutive quarters of strong growth since that date.

It’s also good to put the jobs debate in perspective. Here’s a graph of the unemployment rate over the last few decades. As can clearly be seen, this has been a relatively shallow recession.

For more reading on the subject I suggest this piece by Edward Prescott, co-recipient of the 2004 Nobel Prize in Economics.

Healthcare: Often when politicians talk about controlling healthcare costs what they are actually talking about is controlling healthcare prices. They can do this through price controls (importing price controlled drugs from Canada) or by picking up the tab themselves (ala Kerry’s healthcare proposal). To control actual costs you have to either increase supply or decrease demand, it’s that simple.

Bush’s Health Savings Accounts (HSAs) get insurance covering what it is supposed to be covering: unexpected and rare events. Insurance isn’t supposed to cover routine medical expenditures but due to bizarre tax laws that is exactly what it has become. Bush’s HSA accounts allow individuals to set up tax free accounts for common medical expenditures (antibiotics for the example) while leaving insurance to cover rare and expensive items.

This has two main benefits. First, it gets patients asking the all important questions: “how much is this going to cost?” (For example if a doctor charges you $150 for a routine visit but your insurance covers the entire cost, it doesn’t affect you one way or the other. However, if you are paying for the doctor out of your own private account, you are most likely are going shop around to get more bang for your buck.). Two, it makes your healthcare insurance portable. Just as 401Ks have made company pension plans less attractive and have given employees the freedom to change employers without losing retirement benefits, HSAs will have the same effect. People often fear leaving a job as they lose their company provided health insurance, but employees own an HSA themselves and it will move with them from career to career. These are two big improvements over the current system.

Kerry’s plan involves a huge government expenditure which does nothing to change incentives.

A more detailed analysis can be found here.

Education: Kerry once had some pretty radical ideas for education which I support. But running for president you can’t be for school choice and expect to be endorsed by the NEA. As president, he most likely would veto this bill which was supported by fellow Senate Democrat Diane Feinstein. No candidate that puts politics over principles when it comes to educating children would ever get my vote.

Immigration: Kerry is in favor of an amnesty which I support. For those who feel that this would be rewarding those who broke our countries laws I'll refer you here. Unfortunately, I don't think that Kerry could get this through a Republican Congress and in four years we'll be in the exact same position we are in now. Bush has the political capital to get his immigration package though the Congress and, while not perfect, I believe it's a good plan.

That all said, it is always tough choosing between the lesser of two evils.

On election day 1996 I sat in my apartment living room in the late afternoon waiting to see who would get my vote for president. Republicans Bob Dole & Jack Kemp had perked my interest with a plan to cut capital gains taxes in half, which I saw as a way to unlock a tremendous amount of capital that was currently not being transacted due to the high rate of taxation. President Clinton had ridiculed this plan as a tax cut for the rich. I was a junior in college and it was my first time voting in a presidential election. If it was a close race I planned on casting my vote for the Republicans. When the news announced that Florida had gone to Clinton I walked out the door and across the street to the polling place and voted for the Libertarian candidate Harry Browne.

A little over a year later, contrary to his campaign rhetoric, Clinton himself slashed taxes on capital gains to 20% helping to put a bull market in motion. During that term he also helped in reforming welfare, eliminated taxes on the first half-million dollars of capital gains of residential real-estate, and put together a task force to begin the privatization of social security. It is rumored that he felt privatizing social security would be his legacy that would be remembered for generations to come. Unfortunately, a fling with a certain intern named Monica threw a monkey wrench in those plans as Clinton had to return to his base to fight off impeachment.

Could Kerry be saying one thing now just to get elected, while he would be pleasantly surprising me in just a few short years? Possible... but from watching this campaign I'd have to say it is doubtful. The best thing that's going to come out of a Kerry Administration is gridlock, which truthfully might be better than the alternative.

And what if on Wednesday morning we find out that Senator Kerry will become President Kerry this coming January? If this is to come to pass, I ask of my friends who will be rejoicing in his victory just one request: do not turn on your principles for the sake of party loyalty. Over the last four years I've had intriguing discussions with various friends criticizing Bush for his wreckless spending, the pork laden farm bill, steel tariffs, a bloated Medicare giveaway, the Patriot Act, and of course for the war in Iraq.

However once the Democratic primaries started the mood changed. All of a sudden free trade wasn't quite as appealing, outsourcing suddenly became ever so worrisome, and while Bush's Medicare reform was still awful... what could be so bad about nationalizing healthcare?

In a way it reminded me of coming back to the States after nearly a year in Spain. During the months preceding my departure the U.S. was bombing the Balkans like there was no tomorrow. There was news footage of the destroyed Chinese embassy and Gen. Wesley Clark was caught defending the bombing of a passenger train using military footage that was played at three times the normal speed. My European classmates and co-workers were outraged. Once I returned to the U.S. however, nobody really seemed to care except for a few lefty wackos (but who listens to them). If a Democrat starts a war it must be a good one... right?

If politicians know that the party loyalists will ignore principles just to keep their guy in office, they certainly will take advantage of it. Republicans may have lost this election by trying to keep a smile on their face while being stabbed in the back on issues such as free trade and spending restraint.

If Kerry is victorious I hope his supporters will learn this lesson quickly. I don’t know if I can handle four years of a partisan defense of his administration.