The "radical" plan Obama is rejecting

The Cato Institute has reviewed the latest Republican plan to stop the US overspending slow down the growth in US government spending, it isn't impressed:

The plan is to cap discretionary spending over 10 years to achieve $1.2 trillion in savings; have (another) bipartisan group of policymakers come up with $1.8 trillion in “deficit reductions” over ten years; and get a vote on a balanced budget amendment. In exchange, the president would get to increase the deficit by $900 billion this year and by another $1.6 trillion next year.

That means:

• Under the Congressional Budget Office’s optimistic spending baseline, the federal government will spend $46 trillion over the next ten years. Obviously, reducing spending by $1.2 trillion oven ten years is relatively small.

• The same dysfunctional congress that treats entitlement programs like lit sticks of dynamite is supposed to come up with $1.6 trillion in “deficit reduction.” Note that we’re not even talking specifically about spending cuts here, so that figure would likely include tax increases assuming they’re able to even come up with something.

• Under the Boehner plan, spending and debt will continue to rise. At the most, the plan would produce an average of $300 billion a year in cuts in exchange for increasing the debt ceiling by $2.5 trillion over the next two years.

• Boehner’s bill includes language that tightens up the definition of what constitutes “emergency” spending. Congress regularly slaps the “emergency” designation on all sort of non-emergency spending bills.

• Where are the immediate spending cuts? Once again, we have the promise of cuts but no specifics. Even if the discretionary caps hold the line on that portion of spending, total federal spending (and debt) will continue its unsustainable upward climb. Entitlement spending is the biggest driver of our long-term budgetary problems but entitlement spending isn’t capped under the Boehner plan.

Obama is rejecting this, because he wants more taxes and wants the issue resolved so it looks like he managed to chaperone a compromise that will outlast his Presidential term.  Of course, some Democrats want tax increases to be a major component of the deficit reduction strategy, because they want to entrench the growth in government that has been the legacy of Obama and Bush before him.   Tea Party aligned Republicans want deficit reduction to be entirely about spending cuts, and I agree.

Even the Cato Institute's own rather meek plan, by Chris Edwards, to cut spending would be a vast improvement, because a balanced budget would still be a decade away, but so much wasteful spending would be addressed.  It would cut the Federal budget to 18% of GDP, down from Obama's projected 24%.

It is about competing visions for the USA.  Some Democrats (and likely Obama himself) want the US to be more like Europe, and to have an activist state involved in health, education, welfare and economic development more than now.  Tea Party Republicans want to keep a sizeable gap between the European size of the state and the US, and want to balance the books by getting spending down, and then address the debt bubble.   However, I suspect most congressmen and women from both parties just want to get elected, be loved and popular, and to convince people that they are just the right ones to solve their problems.  The deficit being something most have spent little time thinking about.

For now, it is a game of chicken.  Obama does not want a deal that needs to be replicated next year during the election season, he wants to look like the honest broker who saved the country from bankruptcy (or at least convinces his core voters that he is in charge and competent).  The recently elected Republicans don't want a deal that includes any tax rises, because they campaigned against that, and they want a balanced budget constitutional amendment so that there is a legal requirement to eliminate the deficit over time (and avoid the risk of this ever happening again).   Both Obama and the Republicans fear being blamed for a default.  Obama bears the bigger risk, because he is President and more people think he is in charge than Congress.  All the Republicans can say is they reject any tax increases, and want to cut waste.  Yet, they also don't want to be seen as being incapable of compromise.

Two visions of the USA - will one win, or will a lily livered half arsed middle ground be found that does barely enough to get past this hurdle.

100% result in DPRK election

North Korea held its local, municipal and provincial elections.

It had 99.97% turnout (disgraceful yes, but it was noted that some were working on oceans or abroad - haven't they heard of absentee ballots?)

and 100% of those who turned out voted for the single candidate.

Even the ephebophile, megalomaniacal, pathological liar.

Meanwhile, there are still tens of thousands in gulags, including hundreds of children, and Amnesty International still has no campaign on the place, oh and Reverend Don Borrie of Porirua still remains Kim Jong Il's useful idiot in New Zealand.

Debunking the "building roads causes congestion" myth

For some time now transport policy has been influenced (and in some countries dominated) by an ideological branch of the sector which could best be called "planning environmentalists".  This group has the following set of views, which are based more on philosophy and politics, and rather less on evidence:

- The problem with transport is people driving;

- Helping cars move is a negative because cars kill, cars pollute and cars take up a lot of space;

- Building new roads magically induces more car trips, so roads shouldn't be built, in fact in some cases they should be closed (the busiest ones);

- People are "dependent" on their cars, rather like drugs, but they would rather not be, they would rather use public transport if only the choice was there;

- Travel by public transport is good, the more the better;

- Travel by rail is almost nirvana, it is the safest, least pollution, can carry the most number of people, can be easily powered by electricity.  The more of this, the better we will be;

- Where railways can't even start to remotely seem sensible, light rail (trams) are the next best thing.  Cheap trains at street level.  People love them, the more the better;

- When even light rail is insanely expensive, buses are ok, but they are only ever a stopgap (after all they have diesel motors, use rubber tyres and um roads);

- Cyclists are important too, except when they disagree with light rail;

- Walking is important, but please don't talk about people who walk or bike who might be attracted to highly subsidised public transport - because that can't ever be a bad thing;

- Freight movement in cities is largely ignored because despite the best will in the world, it can't be moved by rail in any great volume.  Freight benefits from public transport though;

- Public transport relieves congestion, except it doesn't, but actually what we mean is it doesn't actually matter.  Congestion is a good thing, it is a tool to encourage people to use public transport (A Green Party policy advisor told me this himself);

- Road pricing is fabulous, but only to penalise cars.  All the money collected should go to subsidise public transport;

- Road users should pay the full costs of their infrastructure and externalities and pay for public transport subsidies, public transport users should pay a small fraction of the operating costs of their services, or even nothing at all, for they do us good by riding around on those trains;

- Public transport would be more viable if cities were higher density, like Prague, Moscow, Zurich, Barcelona, London.  People should live in high density housing more, less in suburbs.  Planning rules should enforce this, then people could live in tighter communities, travelling by rail, which of course, is what they really want, if only they knew better.

A key part of the dogma behind this, which is wholly embraced by the Green Party, is the notion that if a new road is built, it will become congested within a few years, making the whole construction futile.  It is the only sector where a claim is made that when something is popular, it is a bad thing.  It always ignores whether the road has been priced properly of course.

The Washington Examiner has an excellent article summarising the history behind the claim that building road causes congestion, and the countervailing evidence.  A good example is Phoenix, Arizona:

in the real world, adding highway capacity can prove quite helpful. The Texas Transportation Institute’s annual Mobility Report, for instance, demonstrates an uncanny correlation between capacity and traffic congestion: Areas that add capacity tend to have lower levels of congestion. And induced demand doesn’t always -materialize. Take, for example, the city of Phoenix, a town built with almost no freeway system.

As a result, the Phoenix metro area historically had some of the worst congestion in the nation. Between 1982 and 2007, Phoenix decided to build the highways it should have had in the first place.

They added so much asphalt that, according to the research firm Demographia, the city’s highway-lane-miles per capita grew by 205 percent. During that period, highway-vehicle-miles-traveled per capita increased by only 12 percent. And, like magic, traffic congestion plummeted.

Now what is true for Phoenix may not be true for Philadelphia. And building highways almost certainly induces some demand.

In New Zealand you can see the same, with plenty of examples to prove that building roads need not lead to congestion.  In Auckland, Te Irirangi Drive was built some years ago and has yet to be even close to capacity.  The south eastern highway from the Southern Motorway to the Pakuranga Motorway likewise (despite being built on the cheap).  In Tauranga, toll road Route K is now locally infamous for losing money because of lack of demand, and the related route J north isn't remotely congested.   Wellington's motorway bypassed Tawa  in the 1950s, and neither the motorway nor Tawa are congested.  Upper Hutt has also been bypassed with a sustained reduction in congestion through that city (and on the highway).  Lambton Quay used to be gridlocked at peak times with cars in the 1970s, until the motorway provided a bypass to south of the city.  Nelson's Stoke Bypass has not resulted in congestion in Stoke or on the highway.  

Now when a new road opens up a previously inaccessible, but desirable location, then it will have rapidly increased demand.  New crossings can do this, like the Auckland Harbour Bridge which needed a duplication of capacity within a couple of years of opening.  Tauranga Harbour Bridge was similar, but only when the toll was removed (which moderated demand).   In addition, piecemeal upgrades to a road that eliminates one bottleneck, but doesn't deal with one further along the route can exacerbate congestion at the further bottlenecks (but doesn't destroy the case for relieving congestion for those who do not go that far).

Modern cities throughout the world have used road building as part of their strategy to meet transport demand.  Where they have failed is in unfettered construction that means a subsidy from those who don't use the road for those who do.  In short, without using the market tool of pricing, building new roads can simply be just another subsidy.  

In New Zealand at the moment there isn't any appreciable use of pricing to manage demand to meet supply, but there is a major road building programme - one that does involve a considerable subsidy to road users in particular parts of the country (Auckland and Wellington mainly).    A more commercial approach may not build so much, and certainly not so fast.   Sadly, the main choices in policy offered to voters are to embark on grand Think Big road projects (e.g. Transmission Gully and the Puhoi-Wellsford motorway), or to embark on grand Think Big rail projects (e.g. Auckland underground rail loop and Auckland airport railway).   Actually letting users decide with their dollars seems something neither the Nats or the Greens can get to grips with.

Don't believe the EU agitprop - the Euro crisis is not over

For all of the hype yesterday from the politically (not democratically) appointed European Council President, and the cheers and handshakes from Presidents Merkel and Sarkozy, you might think there is reason to breathe a sigh of relief.  The use of the term "Marshall Plan" to describe what has been done is so wildly far from the mark that it continues to confirm my view of how malignant the European Union, Commission and Council actually are.  It is an institution as addicted to lies as any politician could be.    The big driver for Merkel and Sarkozy can be seen on this graph on the BBC news website.  Both French and German banks and governments are by far Greece's biggest creditors.

The immediate reaction to the announcements was the usual lemming like attitude of the currency and sharemarkets as many suddenly had confidence where there was no confidence before.  Some of that will be the attempt to make some short term returns from the bubble of optimism, for that is all it would be.  All the Eurozone leaders have done is buy some time, by pilfering the bank accounts, wallets and purses of their children and grandchildren - fiscal child abusers like so many politicians.  

As I predicted yesterday, a bailout solution will involve a form of fiscal union.  It was confirmed that details of how Eurozone countries will integrate tax and spending policies will be forthcoming.  Nothing has been said as to whether taxpayers in Eurozone countries will be asked whether such a fundamental constitutional shift will be put to referenda, for that is not in the style of the European Union.  It wont let democracy or public opinion get in the way of "the project".  Even the Guardian admits it is the "democratic deficit".  

Yet that isn't my biggest concern, for whilst it is easy to assert that if asked, it is unlikely European voters would see sovereignty transferred wholesale to Brussels, it is more fundamental that it is quite simply immoral for people in one country to be forced to bail out the fiscal profligacy of those in another. 

The plan is as follows:

- A tranch of Greek public debt will be transferred to the European Financial Stability Facility, effectively "EUising" the debt, with the maturity extended to about double the current average period.  The interest rate will also be cut to 3.5%.  In short, Greek debt is being transferred to primarily German, but also Austrian, Dutch and French taxpayers.

- Greece will "temporarily default" as private lenders will be effectively blackmailed into accepting a 20% writedown on the loans.  In effect the loans will be transferred to the European Financial Stability Facility (EFSF), with extended maturity periods and lower levels of interest.  Greece will effectively be unable to borrow from private lenders in the foreseeable future.  Private lenders will take a hit of around 13.5 billion Euro as a result, but will contribute up to nearly 50 billion overall.

- New EU bonds (debt) will be issued with a AAA rating.  In effect, Germany will be borrowing on behalf of Greece.  German taxpayers will be forced to use their hard work and savings to prop up the profligate and spendthrift Greeks.

- The EFSF will have new powers allowing it to buy sovereign debt from countries held by private creditors and cutting the interest rates on that debt.  In short, German taxpayers subsidising lenders to profligate countries. 

Greek public debt will be cut by 12% of GDP, albeit from the current level of 140%.   This should make it easier to service.  The overall value is 159 billion Euro.  However, it doesn't deal with the fundamental problem.

Greece is still overspending, on a rampant scale.

If Greece cannot cut its state sector back and radically reform its economy, it wont meet the deficit reduction targets that have been conditional for this and the previous bailout.  All this is doing is buying time.   It was made clear that Greece is a "special case".  There is no capacity to do the same for any other of the countries known as the PIIGS (Italy being added to Ireland recently).  Although it was noted that Spain and Italy have both committed to major austerity programmes to cut their deficits, which may just save them from a similar crisis.

Moreover, the Eurozone countries have agreed to "legally binding national fiscal frameworks" by the end of 2012.  That means surrendering sovereignty over tax and spending policy to the EU.

What's next?

If Greece's announced austerity measures are actually implemented, it may well be the end, but it has failed to do enough to date.  Greece needs to drastically cut and eliminate its budget deficit in the next two to three years so that it need not borrow anymore - for it is about to default, and will be unable to do more than is provided for.  This really is the last chance, unless other Eurozone governments are willing to rob from their children and grandchildren some more.

If Greece fails to cut its deficit there may well be another bailout, but with the French Presidential elections in April 2012, and German Federal Parliamentary elections in September 2013, Sarkozy and Merkel will be keen to avoid being seen to sell their people out to the Greeks.

Ireland, Portugal, Spain and Italy are also on the horizon.  All have announced austerity plans, but of those Portugal looks the weakest.  The thing to watch is whether in the next tranch of borrowing (which all of these countries must do), is whether there is enough confidence in the markets to allow it, and at what interest rate.  This bailout will raise confidence somewhat, but for the likes of Spain and Italy, few will be convinced that the Eurozone countries could afford to duplicate the Greek deal.  Their budget deficits will need to be dramatically slashed in the next two years to avoid risk of default.

However, watch blood to be spilt in forthcoming months over fiscal policy.   Central to Ireland's economic fundamentals has been a low corporate tax policy, which has encouraged many firms to locate there in preference to the UK and other Eurozone countries.  If the forthcoming "fiscal framework" does away with this, then Ireland will face a choice of abandoning this tax policy - in order to remain in the Eurozone, or doing away with the Euro.  Ireland's debts are due to it foolishly promising to provide 100% guarantees for bank deposits and then bailing out banks that lent into its overheated property sector.  It is NOT due to rampant domestic overspending.  

Further out, Belgium and France face big fiscal bubbles.  France's public debt as a proportion of GDP is 84%, Belgium's is around 100%.  Governments all over the world are having to face up to reality that they can't overspend forever.

However, for now attention will shift to the United States, where the most limp wristed efforts at addressing rampant overspending are now being presented as a "solution".   As the Cato Institute says, the so called "Gang of Six" plan is lousy.  A detailed assessment is here, and while it does see some tax reform, it also increases taxes by US$1 trillion, does nothing to address the looming Medicare/Medicaid overspending and "cuts" by reducing the rate of increased spending to below the rate of estimated economic growth and doesn't see a balanced budget in the foreseeable future.   Obama likes it, which speaks volumes.  Cato has a far more ambitious, but still quite cautious plan here, which would balance the budget by 2021, without any tax increases.   It reduces government spending from 24% to 18% of GDP, to match tax revenues which will be at that level.  Don't expect Republicans to spend much time supporting that, for they are almost as bad as Democrats in their addiction to fiscal child abuse.

And in real news today

The Greek government continues to try to borrow, yesterday its two year government bond rates were priced an at annual interest rate of just over 39%.

Great investment? No. It's the swansong before the funeral march.  Anyone lending the Greek government demanding such rates sees it as having a high risk of default.  A default that will reverberate loudest in Dublin, Lisbon, Madrid and Rome, but will buffet Brussels, Paris, Amsterdam, Vienna, Helsinki, Luxembourg, Nicosia, Valetta, Bratislava, Tallinn, Ljubljana and of course, Berlin directly.  However, the echos will go throughout Europe and be heard globally, for it will be the beginning of the end of the Euro as we know it. 

If journalism wasn't full of solipsistic onanists obsessed with News International, then there would be more than a smattering of well written articles hidden in papers about all of this. 

EU politicians are caught between two unpleasant facts:

1.  Politicians in the "south" of the EU have spent the past generation largely bribing voters with other people's money lent to them at preferential rates.  The other people have started giving up lending it, and the politicians haven't the courage or moral fibre to admit that the state largesse of recent years must end or that taxpayers will have to pay a lot more to get it.  The people in those countries are unwilling to accept either, and blame the lenders for the largesse, not the people they elected who borrowed it on their behalf.

2. Politicians in the "north" of the EU are concerned that if governments in the "south" default, it will be their lenders that lose out.  The banks, insurance companies, pension funds, private investors and businesses who saw lending to profligate socialist politicians in the south as being a "secure investment", risk losing billions.   However, voters and taxpayers in the "north" don't care.  They haven't elected politicians who have been quite so profligate in spending money that they had to borrow, and haven't had lifestyles and living standards substantively propped up by such blatant socialism as retirement ages in the 50.  They don't want to bail out the "south" nor do they care that investors in their countries will swallow the cost of it, as long as it doesn't affect their savings (it shouldn't) or their pensions (it might).

Politicians of the "south" have nothing left to offer, they are almost universally a disgrace, and their philosophy and attitude (and that of their predecessors) has produced a false golden age for their countries.

Politicians of the "north" want to bailout the governments of the south, to avoid bailing out the banks and investors who lent to them, but know that voters in their countries are not amused.   What they want is to control the spending and tax policies of the countries of the "south" in exchange for bailing them out - for otherwise, how can they be brought under control to behave better?

So Germany and France will seek to bring all Eurozone countries under central fiscal policy control, in other words, it wont be up to the Parliaments in Athens, Lisbon, Madrid, Rome, etc. as to levels of tax, or levels of spending, it will be up to either the one in Brussels/Strasbourg, or something new.   

Call it the Commonwealth of Eurozone States, or the United States of Europe, or the European Soviet Socialist Republics, or the Union of Eurozone States, but it will be a wholesale surrender of state sovereignty to a super-state.

Will the people of the countries of the "south" tolerate this?  They will be told they have no choice, it is either that or they are expelled from the Eurozone (which does not mean they cannot use Euros, but does mean they would have no role in formulating monetary policy). Ireland, in particular, will baulk at surrendering its highly competitive low company tax rate, which politicians in Paris and Vienna have been keen to attack, among others.

The bigger issue is not only will the countries of the "south" baulk at this, but also will others not in crisis.  Estonia, Slovakia and Slovenia may all wonder why they left the yoke of centrally planned economies to have joined a new ones.  Estonians and Slovaks will not want to have swapped control from Moscow (and for Slovenes, from Belgrade) for control from Brussels.  I suspect the Dutch too will be fed up.  France and Germany, and their virtual satellites Belgium and Austria, will happily go along with it as they will have the power in any central fiscal union.

Ultimately, it can only go one of three ways:

- A Eurozone bailout that creates a new fiscal union among Eurozone members, extracating sovereignty from national capitals to the EU and having to implement tax and spending policies in line with France and Germany;

- A Eurozone default, resulting in countries exiting the Eurozone, with dire consequences for their national banking systems, their creditors and needing to implement austerity policies on a grand scale because of the complete inability to borrow;

- Agreement to a massive austerity programme by the Greek government that cuts the budget deficit suddenly and dramatically, reducing the pressure on creditors.

All in all, the countries of the "south" face severe spending cuts and probable tax increases no matter how it goes.  

For countries outside the Eurozone, the biggest concern is managing the fallout from whatever happens, for it is likely to hurt.  As Allister Heath in City AM today says:

Osborne and his advisers ought to be working day and night on contingency plans in case the Eurozone collapses or the US defaults, not worrying about ex-tabloid journalists.

The British government should be ensuring it has no part in any bailout of the Eurozone, that it may be willing to re-accommodate Ireland seeking to abandon the Euro, in favour of the currency of its largest trading partner (if it so chooses) and to lead an effort to restructure and reform the European Union into a looser customs union, with a smaller central role, without grand vanity projects, without grandiose corporate welfare systems, without interference in national economic or social policies beyond basic rules on non-discrimination and freedom of trade and movement of citizens.  If some EU Member States want more control, let them have it, keep Britain out of it.  If the EU project is about to splinter, then let the UK lead efforts to recraft it into something worth salvaging, a basic treaty that keeps borders down and markets open, but does not demand that countries embark on grand unifying projects of statism.

In the meantime, can people simply remember that the Liberal Democrats, Tony Blair, the BBC and the Independent were all wrong on all of this?  (and yes, Gordon Brown was right, along with William Hague, Margaret Thatcher, Nigel Farage, the Daily Telegraph and the Daily Mail were right).