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NY Analysis of Policy & Government

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Abandoning Space

The substantial troubles faced by the U.S. economy have been made worse by Americas’ gradual loss of technological superiority to other nations.  The most salient example of this is the nation’s vaunted space program, the preeminence of which has been sharply diminished due to budget cuts. Can privatization of space activities restore the country’s leadership in this crucial realm?

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   The successful mission of the SpaceX company’s Dragon space craft, launched by the corporation’s own rocket, Falcon 9, provided a desperately needed boost to American space fortunes.  The nation’s credibility had been severely reduced when the Shuttle era ended with no replacement capable of engaging in the orbital activities necessary to maintain a strong presence in space.  It is highly disturbing that after winning the race to the moon and outlasting the very existence of its chief rival, the Soviet Union, Washington is currently incapable of putting an astronaut into space and must pay Moscow to ferry astronauts to orbit.  China, which has also launched men into space, is currently more capable of manned space flight than America. Beijing has embarked on an exceptionally ambitious program that includes plans for its own orbiting space station and trips to the Moon.
   The U.S. has no plans for reestablishing a manned space program until 2017, at the earliest.  But as any observer of federal budgetary practices knows, plans that go beyond the tenure of the current administration are not guaranteed, so even that date can’t be certain.  Just as Spain lost its preeminence in exploration to Great Britain centuries ago, the United States is in danger of surrendering its leading role in space to other nations, particularly two nations which are not friendly to America.
   Commentator Charles Krauthammer notes that while in the future private companies will have a vigorous portion of space activity, that future remains decades away, and “In the interim, space will be owned by Russia and China.”
  Democrats in Congress during the Bush (43) administration began to grumble that America’s future plans would spend funds they felt should be committed to domestic programs. President Obama acted on those concerns after taking office. The vast sums he spent on stimulus programs included nothing for NASA. Republicans have failed to vigorously opposed the lack of White House support, and have not made the matter a significant issue.  Indeed, they too have at times been less than supportive of NASA’s needs.
   It’s not only manned space flight that has been slashed by the Obama White House.  According to the Planetary Society, “The U.S. Administration’s proposed budget for fiscal year 2013 would force NASA to walk away from planned missions to Mars, delay flagship missions to the outer planets for decades, and gradually slow the pace of scientific discovery…if this budget is allowed to stand, the United States will walk away from decades of greatness in space science and exploration.  More than that, the U.S. will lose expertise, capability and talent…we’ll quickly stop producing scientists, technicians, and engineers that can lead.”
   Both Presidents Bush (43) and Obama gave more verbal than fiscal support to the space program, (which even when “fully funded” receives only about 1/2 of 1% of the federal budget.  A space research advocacy publication, Mars Daily, notes that Russia commits a higher portion of its GDP to space industry than the U.S.) but the recent cuts under the current administration have been the most severe. The detrimental impact on the general American economy from defunding space efforts can’t be overstated.  Over 94% of every dollar funding space sciences goes to universities, industries which provide well paid positions, and other organizations.  As reported in a previous NY ANALYSIS OF POLICY & GOVERNMENT report, up to 27,000 skilled and related positions may be lost due to the underfunding of space activity.
  According to statements made by former House Majority Leader Tom DeLay to the Washington Times, “The absolute lack of understanding of the importance of human space flight that this administration demonstrates is mind-numbing…the issue isn’t just jobs, although, of course, in this economy every job is precious…it isn’t even about America being #1 in the world…it isn’t even [only] about national security and the need to maintain our industrial base…there is something innate in humanity that calls us to [explore.]”
  Private companies are attempting to fill at least part of this void, with significant support from the public. According to a Wall Street Journal poll, 76% of Americans enthusiastically support corporate efforts.  The concept of allowing the private sector to boldly go where only governments had gone before actually began with President Reagan’s 1984 signing of the Commercial Space Launch Act.  It was supplemented in 1990 when President Bush (41) signed the Launch Services Purchase Act. Russia has also seen private ventures interact with government space efforts.
  The extraordinary success of the DRAGON mission to the International Space Station is a landmark in the privatization effort.  According to Philip McAlister, NASA’s Director for Commercial Space Flight Development, “NASA is working with private industry in an unprecedented way, cultivating innovation on the path toward maintaining America’s leadership in space exploration.” This represents a change of heart on the part of the space agency.  According to Lewis Solomon, author of  The Privatization of Space Exploration, “For too long, NASA’s culture remained indifferent, if not hostile, to commercial activity.”
  Approximately $381 million was committed by NASA for the DRAGON effort. Complementing unmanned plans, NASA’s Commercial Crew Program will attempt to launch astronauts using private facilities and vehicles. SPACEX  seeks to accomplish that goal in about three years.
  NASA is still developing its own ORION manned capsule, an advanced version of the old APOLLO spacecraft that will utilize a new launcher to place Americans into space.  Funding issues continue to plague the effort, however.
  NASA essentially plays the role of the chief, and in many cases sole, customer of advanced space technology under its Commercial Orbital Transportation Service program (COTS), an effort that began in 2006 with investments of about $800 million. That figure does not cover any private manned space craft which a number of companies are developing for a variety of uses, including space tourism. The goal is to use the private sector to provide space services in a less costly manner than a government-run program could.
  A NASA document states that “Under COTS, NASA is helping commercial partners develop and demonstrate their own cargo space transportation capabilities to serve the U.S. Government and other potential customers.  The companies lead and direct their own efforts, with NASA providing technical and financial assistance.”
  NASA wants to outsource to the private sector all cargo and crew missions to the Space Station by 2017.  However, both the Senate and the House have sliced funding from the effort.  Critics both in and out of government have complained that NASA should select a single contractor, rather than encourage competition among a number of companies, in an effort to accelerate progress and end America’s embarrassing inability to launch its own astronauts.
  Other obstacles affect private sector initiatives, as well.  Uncertainty over a number of international legal issues may chill corporate efforts.  An “International Code of Conduct for Outer Space Activities” may impose unforeseen burdens on private, military and civilian efforts. The Obama Administration favors the Code, and has not included Congress in his deliberations.  Congress has expressed concern over potential issues, and has enacted measures to counter the Administration’s plans.

  The United States must rethink its diminished emphasis on space exploration and exploitation immediately.  Even the most hard-pressed farmer knows that eating the seeds meant for the next harvest is a bad idea.  Withdrawing from the arena that will be a prime focus of economic wealth in the coming years in order to save a relatively minute amount is a terrible investment strategy.

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INTERNET FREEDOM IN PERIL

Members of the United Nations will meet this coming December at theWorld Conference on International Telecommunications in Dubai to conduct negations that will impact the future of the internet. The freedom to engage in uncensored political speech is at stake.

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   Despite the seriousness of the topic, there will be little public input at this government-only meeting.  Several nations, particularly Russia, China, North Korea and Iran are expected to vigorously push for the legal ability to control the internet beyond their own borders. Worried advocates of continuing free speech have demanded more openness in preparations for the landmark meeting, and that no change be made to the unrestricted nature of discourse within this powerful medium.
 Summarizing the recent Toronto Conference on Internet Issues,Cyberdialogue 2012 noted that “Positions are solidifying around two very different visions marked by strong ideological undertones…the current situation represents a battle over values: the value of an open, democratic cyber commons on the one hand versus a closed state-dominated architecture on the other.  The internet has become the strategic and operational centre of gravity in this battle, while states are using different instruments of power and persuasion to shape or control it.”
   The impact of the internet on dictatorial countries has been traumatic, and authoritarian leaders are reacting.  As noted by United Nations Secretary General Ban Ki-Moon last month, in 2011 60 journalists were killed, the highest level since the 1990s. In 2012, one journalist has been murdered every five days. “…countless others faced intimidation, harassment and censorship at the hands of governments, corporations and powerful individuals seeking to preserve their power or hide misdeeds.”  Arrests and killings of those writing on the internet have been increasing in number. U.N. General Assembly Chair Nassir Abdulaziz Al-Nasser noted that the “Arab Spring” would not have occurred without the internet, as noted in UN Document OBV/1099.
   In 2011, Secretary of State Clinton noted that China has pressured private companies to engage in “self management, self-restraint, and strict discipline.”  In other words, Beijing forced the private sector to self-censor out of fear of being excluded from the lucrative Chinese market.  However, rather than championing the concept of unrestricted free speech, she noted last December that “…delivering on internet freedom requires cooperative actions…”
  Clinton’s State Department has failed to adequately combat internet censorship, according to the Global Internet Freedom Consortium.  In fact, although Congress provided $50 million in funding to the State Department for this fight, little has been done.
   Unlike the American concept of First Amendment rights, Secretary General Ban Ki-Moon has echoed those who believe in censorship by stating that “considering the immediate impact of information in the digital world, journalists must be much more responsible in their work to ensure accuracy, balance and fairness, and not use the media to disseminate hatred or conflict, or incite violence.”  Unfortunately, the definitions of “accuracy, balance, fairness and inciting” would be left to the same rulers who internet writers may be opposing.  The fact is, both governments and other powerful institutions have increasingly killed, arrested or censored internet journalist.
   Raven Clabough writes that China, Russia, Tajikistan and Uzbekistan are introducing a resolution at the U.N. to establish an internet “governance” concept that would insert censorship into this most democratic of media.
   “These authoritarian countries have pushed an agenda to censor the internet in a variety of forums.  In 2011, they suggested at the U.N. General Assembly that a code of conduct be introduced for the use of the internet through international law.  They also proposed the creation of a separate UN “super agency” to be responsible for managing all aspects of internet policy…Last year, Russian Prime Minister Vladimir Putin met with the head of the [UN’s] International Telecommunications Union [ITU] and declared ‘international control over the internet’ to be vital.  Former UN Ambassador David Gross contends that “in the…[December] conference…countries such as China and Russia will once again attempt to expand the authority of the ITU.”
   In addition to the well-known authoritarian regimes, Brazil has vigorously pursued the concept of “policing” the internet.  Former U.S. Rep. Rick Boucher (D-Va.), who once served as chairman of the House’s Subcommitee on Communications, technology and the Internet, and co-founded the Congressional Internet Caucus, believes that once the Pandora’s Box of regulation is opened, the censorship impulse will continue to grow stronger.  “The serious danger of imposing greater regulatory control over the internet’s “hub” is that multinational regulation naturally moves in the direction of the most aggressively regulatory regimes.”   He notes in a Politico article that “It is particularly curious that China is now advocating for greater centralized control over the internet-when it is already so successful at imposing rigidly authoritarian web regulations on its own citizens.”
 Concern has been mounting in Washington about the Obama Administration’s position on the issue.  Prior to 2010, according to a National Research Council report cited in Cyberdialogue, the USA, for the most part, avoided international “cooperation” regarding the internet.  However, the Obama Administration has changed this.
  The major shift could be seen in the White House’s acceptance of the innocuous sounding but worrisome Anti-Counterfeiting Trade Agreement, or “ACTA.”   The general purpose of the measure is to establish global standards and an international legal framework to enforce intellectual property rights, copyright laws, etc., a goal that is clearly in American interest. But both the means it uses to do so, and the manner in which the President imposed its provisions, has caused extraordinary concern to civil libertarians and constitutional traditionalists.
 Under the treaty, signed by President Obama last October, foreign corporations are entitled to demand that internet service providers (ISPs) remove web content within the United States without any court supervision.  The precedent this sets will be used as a bedrock precedent for authoritarian nations to demand that critical comments be removed from U.S. websites in future treaties.
  Equally as worrisome is the manner in which Washington “ratified” the measure.  The treaty has been presented by the White House as  an “executive agreement,” circumventing any interaction with Congress.  As noted in theIndependent Political Report, “by signing ACTA without Senate approval, Obama has called his commitment to internet freedom into question.  As noted in a Forbes review, “The treaty has been secretly negotiated behind the scenes between governments with little or no public input…ACTA bypasses the sovereign laws of participating nations, forcing ISPs across the globe to act as internet police…opponents say the convention adversely affects fundamental rights including freedom of expression and privacy.”
   The rising threat of governmental censorship and lawsuits is threatening the internet’s freedom.  A Boston College International and Comparative Law Review analysis written by Kevin Meehan notes that:
   “Many internet content providers are faced with the uncertainty of being sued in unanticipated jurisdictions for violating unknown laws with untold consequences. Their fear is grounded in a realty demonstrated in a Brazilian court order entered against Google subsidiary YouTube, which resulted in at least one Brazilian telecom company blocking the site from its internet users.  Although the judge vacated his order shortly after the ban went into effect, this libel case demonstrates the enormous impact internet jurisdiction can have e-commerce.”
   Other cases, notably one involving Yahoo! and the French courts, have had a chilling effect on U.S. ISPs, even though they have not yet overruled 1st Amendment protections. Franz Mayer, in a review essay entitled The Internet and Public International Law-Worlds Apart? emphasizes that experts such as Stanford Law Professor Larry Lessig  detect a trend towards “more and more regulation through code under the influence of commerce, which, according to him is not inevitable, as there is a choice as to what cyberspace will look like and what freedoms it will guarantee.”
   Can legitimate concerns such as copyright protections be addressed by an overarching international regulatory super agency, without impeding American 1st Amendment rights?   Increasingly, the answer appears to be a resounding “no.”  Mark Joyce, in an article entitled Censoring Cyberspace: A Free Speech Analysis of the Problems, Controversies, and Possible Solutions Posed by International Internet Regulation, notes that “An international agreement, while perhaps a good idea in theory, is ultimately an unrealistic objective, given the vast range of perspectives, across the international spectrum, on exactly what content should be protected and what should be prohibited.” Joyce concludes that simpler cooperative efforts on a state to state level offer more practical solutions.
   The very fact that international meetings involving new internet regulatory discussions are held largely apart from public scrutiny and participation is sufficient to warrant deep and substantial distrust. Americans have protected their Constitutional rights against foreign military threats for over two centuries. It is highly inappropriate to allow them to be limited now under the aegis of an unelected international regulatory agency.
   Neither the President nor the legislative branch possesses the constitutional authority to limit free speech rights under any international internet regulatory framework.

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Missile Defense Debate

Observers describing the fall of the Soviet Union have noted that President Reagan’s 1983 proposal to develop an anti ballistic missile defense system played a role in the Kremlin’s loss of confidence that led to the breakup of the USSR.  Decades later, this unique defensive weapons concept remains at the center of national and international controversy.    

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   The need for defense against a missile attack aimed at the United States and its allies has become more pronounced than ever.  China is now a major threat, along with several other states.   Iran already has medium range missiles capable of hitting targets throughout the Middle East and Southern Europe, and, with assistance from the Russians and North Koreans, will have an ICBM capable of targeting the USA by 2015. (There are also some intelligence reports that Tehran may share this technology with Syria.)
   North Korea’s No Dong missile can reach US allies Japan and South Korea, and is expected to soon perfect its Taepo-Dong 2 missile which can target America.  Even more worrisome, Pyongyang is developing a road-mobile ICBM, which could make it immune from allied efforts to prevent a launch of a nuclear strike against American soil.
   NATO Secretary General Anders Fogh Ramussen, As quoted in a National Review article, is concerned that over thirty nations have acquired or are seeking to acquire ballistic missile technology.
   Not to be forgotten, Russia has modernized its ICBM capability. The Obama Administration’s New START Treaty with Moscow mandates that Washington reduce its strategic capabilities, while allowing the Kremlin to expand theirs. While the U.S. delays implementing an effective ABM shield, START allows Russia to make strategic gains.It wasn’t just Republicans that were infuriated.  Rep. Denny Rehberg (D-Mont.) was quoted in The Hill newspaper stating that “The new START treaty with Russia will go down as one of the worst, most one-sided deals in our country’s history.”
   The ability to defend against an incoming missile by means other than the threat of launching a counter attack against an aggressor helps eliminate the threat of a nuclear exchange escalating out of control.  Ellen Tauscher, the State Department’s Special Envoy for Strategic Stability and Missile defense, noted that “it presents an opportunity to put aside the vestiges of cold war thinking and move away from Mutually Assured Destruction toward Mutually Assured Stability.”
   The threat comes from both long-range ICBMs and theater-range missiles. As recently noted by the State Department’s Frank Rose, who serves as the Deputy Assistant Secretary at the Bureau of Arms Control, “Today, the threat from short-, medium, and intermediate range ballistic missiles is likely to increase both in quantitative and qualitative terms in the coming years, as some states are increasing their inventories, and making their ballistic missiles more accurate, mobile, and survivable.”
   In response, the House of Representatives included $100 million dollars for ABM development in its version of the 2013 Defense Appropriations Bill this month. The funds would be used to develop a missile defense site on America’s East Coast.  (Two other sites exist in Alaska and California.)  The new site could become operational by 2015, employing 20 ground-based interceptors at a total cost of approximately $2 billion.
   It’s the latest move to provide some protection to the US homeland.  Last November, House Members Mike Turner (R-Ohio), Mike Rogers (R-Alabama), Trent Franks (R-Arizona) Douglas Lamborn (R-Colorado) and Mac Thornberry (R-Texas) urged the Obama Administration to move ahead with missile defense.
   The Obama Administration and Congressional Democrats have been reluctant to implement missile defense, opposing the House’s appropriation for the East Coast site. Rep. Jared Polis (D-Colo.) is seeking to defund the ABM program and redirect the funds to domestic, nonmilitary programs.  The President’s opposition has been longstanding.  In 2001, then-Senator Obama stated that he was opposed to missile defense; as a candidate for president, he pledged to eliminate funding for it. The President continues to advocate the slashing of funding and implementation plans for ABM systems, and is committed to completely prevent any space-related ABM plans.
   The opposition has resulted in significant embarrassment for the White House.  Plans to move ahead with limited ABM protection against an Iranian threat to Europe were a product of extensive negotiations between the Bush Administration and Eastern Europe.  Former Soviet satellites in Eastern Europe, where key ABM elements would be based, had to endure a war of words from Moscow, which has persistently opposed any NATO self-protection measures.  However, President Obama proclaimed on Sept. 17, 2009, that he was unilaterally stopping the plan. The date he announced this was the 70th anniversary of the Soviet invasion of Poland. The President’s decision infuriated Warsaw’s leaders, who had to expend significant political capital to gain approval from their voters.  The resulting loss of Eastern Europe’s trust in the White House directly led to the Czech Republic’s withdrawal from related agreements.
   Thus far, despite wobbling on the part of the White House, Moscow has not been able to dissuade European governments from support for ABM protection.  In an interesting development, Bloomberg News recently reported that France’s new socialist-minded President Francois Hollande has solidly backed missile defense.
   The second major White House embarrassment came in March.  At a meeting in South Korea at a global security summit, the president, believing that microphones were turned off, pleaded for “space” and “time”on the issue of missile defense with Russian President Medvedev.  “This is my last election,” he stated.  “After my election, I will have more flexibility.”  Medvedev replied that he would “transmit this information to Vladimir.”
   Rep. Turner immediately demanded an explanation.  His insistence that the President define what “flexibility” he was offering has not been adequately answered by the White House. The House of Representatives was so enraged that it included language in the recent appropriations bill limiting the President’s ability to negotiate with Moscow on nuclear arms issues.
   Distrust of the Administration’s attitude towards missile defense has been high since the President conceded to Russian demands to cancel plans for additional ground-based interceptors in Europe.  The concession didn’t satisfy Moscow, which now demands written, legislative guarantees that the interceptors be forbidden from countering any Russian missiles.
   Despite their opposition to American ABM efforts, Moscow has long been a leader in antimissile efforts. In 1962, the USSR initiated construction of the globe’s first operational ABM system, and engaged in a major upgrade in the late1970’s.  Its effectiveness, however, was not considered especially high, leading to Moscow’s fears that superior American technology would provide the U.S. with an advantage.
   Russia has conceded the fact that the ABM systems being deployed by the US are of little consequence to the Kremlin’s vast nuclear ICBM force. The Kremlin continues to press for concessions from Washington anyway, despite numerous ongoing trust-building efforts and joint projects on the part of NATO and the United States.  Part of Moscow’s bluster may be part of an effort to take advantage of what they clearly perceive to be a uniquely friendly White House.  Bloomberg News quoted Russian Deputy Defense Minister Antoly Antonov as saying that Moscow seeks to gain long term legislative guarantees against ABM now because “What if a new leader comes in November and dismisses all that the previous one has done?”
   In an effort to rapidly solidify concessions given by President Obama before a potential new administration has the chance to replace it, Moscow officials have resorted to threats reminiscent of the Cold War.  Despite Washington’s concessions to Russian demands that have already alienated the Obama Administration from American allies in Eastern Europe, the Associated Press reports that Russia’s top military officer, Chief of general Staff Nikolai Makarov threatened a pre-emptive strike on NATO missile defense facilities in Eastern Europe if they are built.
   The Russian threats, which are not particularly creditable, are rather hypocritical since Moscow continues to develop its own ABM capability.  Russian media widely covered the combat-ready status of a new ABM facility in Kaliningrad in late 2011, for example.
   Although continuing to face political obstacles, U.S. ABM technology, both for long and theater range threats, has experienced significant successes. This month, the Aegis Ashore program has been green lighted for deployment in Romania by 2015 and Poland by 2018, according to the Missile Defense Briefing Report. The existing sea-based system had a major success on May 10 in its interception of a short-range ballistic missile target with the Navy’s new second generation missile defense interceptor.  This advanced capability, notes the Missile Defense Advocacy Alliance, will allow the U.S. to handle more sophisticated missile threats.

Significant numbers of nations, some of which are openly threatening U.S. interests and allies, are gaining or have already gained advanced nuclear-capable missile technology.  The time for Washington to take protective measures is now.

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Higher Taxes Will Harm The Economy & Worsen Unemployment

As of May 10, the federal deficit was $15,678,869,907,107.48, according to the National Debt Clock.org site.  The question of whether Washington can reduce the deficit while avoiding a worsening of the economic climate has come to a head in the debate over the expiring Bush Tax Cuts.

   Cutting federal spending is a difficult maneuver in an election year.  However, there has been a 21.4% increase in federal spending over the past two years, according to the Wall Street Journal.  Government spending as a share of the economy is about 24% under Obama, several points higher than under President Bush and significantly higher than the historical average of 20.7%, according to U.S. Government Spending.com. A 6.2% increase in federal employees during the Obama Administration, (CNN/Money) and the $787 billion stimulus account for a portion of that hike.

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FEDERAL RECEIPTS/OUTLAYS/DEFICITS
(From Tax Policy Center statistics)
(Billions of dollars, in constant 2005 dollars)
                         YEAR                         RECEIPTS                         OUTLAYS                        DEFICIT
                         1952                          635.6                               650.2                               14.6
                         1962                          659.7                                707                                  47.3
                          1972                         908.1                                 1010.4                            102.4
                          1982                         1202.8                                1452                              249.2
                          1992                         1467.5                                1857.9                           390.4
                          2002                         2028.6                                 2201.3                           172.7
                           ——————————————————————————–
Statistics under Obama Presidency
(2008=Last year of Bush Presidency)
                          2008                        2,288.1                                 2703.8                            415.7
                          2009                        1899                                      3173.4                            1274.4
                          2010                         1927.9                                   3081                               1153
                          2011                          1998.7                                  3126.3                           1127.6
The rate of deficit increase during the three years of the Obama presidency exceeds the general rate of increase per decade over the past half century.
Should tax increases be employed to reduce the deficit?  Should those increases come from allowing the Bush Tax Cuts to expire?
FACTCHECK has refuted claims by DNC Chair Howard dean that “60% of the deficit is due to the Bush Tax Cuts.” According to Harvard Economics Professor Martin Feldstein’s Wall Street Journal article,
“Historians and economists who’ve studied the 1930s conclude that the tax increases passed during that decade derailed the recovery and slowed the decline in unemployment. That was true of the 1935 tax on corporate earnings and of the 1937 introduction of the payroll tax. Japan did the same destructive thing by raising its value-added tax rate in 1997.”
Taxes are scheduled to skyrocket in 2013.  34% of the increases are due to the expiring Bush Tax Cuts, 25% from the expiration of the payroll tax cut, and the remainder from various provisions of President Obama’s health care reforms.  Top rates will climb to 39.6% from 35%, the child tax credit would shrink, the capital gains tax would soar to 20% from 15%, (which could play a major role in a harsh employment picture) and the estate tax would affect more families, as noted in a Heritage/CRS report.
Bloomberg News has described how Republicans, particularly guided by Rep. Ryan, have produced various proposals to prevent the hike.  Senate Democrats  blocked these proposals, although there is general agreement that some protection for taxpayers in the under $200,000 bracket is required.
The higher taxes under consideration would, at first glance, appear capable of reducing the deficit by about 17.7%, as a recent NPR report argued.  But the reality of that concept’s approach is less optimistic. History indicates that tax hikes deepen and prolong economic downturns, promote long term unemployment, and makes the U.S. less competitive in the global economy.  In the final analysis, a reduced economic outlook would reduce federal revenues far greater than tax hikes would increase them.
Heritage examined the effects of tax hikes and cuts during the 1990s.
“The 1993 Clinton tax hikes slowed economic growth during that decade, despite the common assumption that it was a period of rapid expansion.  It was not until a tax cut later in the decade that growth took off.  Lower rates paved the way for faster growth.  The 2003 Bush tax cuts helped the economy recover from a recession [initiated by the “Dot.com” bubble burst] and put it on a stronger footing in the face of growing headwinds [caused in part of the events of 9/11.]”
The impact of higher taxes on the prolonged employment downturn is particularly worrisome, particularly in light of historical analysis.  Under the current administration, the latest (April) unemployment rate is 8.1%, continuing the trend of high unemployment rates which have seen, in April of their respective years,  8.9% (2009), 9.9% (2010), and 9.0 (2011).  These are dramatically higher than the rates experienced during the prior Administration, which ranged from a low of 4.5% to a high of 6.0%.  But these statistics reveal only part of the ominous trend.  Long term unemployment (27 weeks or longer), at 5.1 million, represents 41.3% of all those unemployed, and there are 7.9 million “forced part timers” as well.  Civilian labor force participation has declined to 63.6%, a sharp drop from 2000 (67.1) and even from 2010 (64.7).  The severe, detrimental effects of the past several years of high unemployment will continue even after jobs rebound.  As noted by Christine Dugas in a USA Today article, many families who lost jobs used savings to pay current bills and went into debt.  Even after securing new jobs, they are not going to spend at normal levels until those debts are paid.
This must be contrasted with the policy of the prior administration.  Faced with an economic downturn, President Bush lowered taxes, which produced significantly lower unemployment rates.  The Tax Foundation notes that these followed historical precedent.  When President Kennedy cut taxes, and when President Reagan did the same, the economy accelerated.
Although a 2010 Pew study argued that continuing the Bush tax cuts would negatively impact the national debt, it noted that “many who are concerned about the high cost of extending the tax cuts acknowledge that it would be unwise to let them expire while the economy is still fragile.
The Tax Foundation argues that those who claim that the Bush tax cuts didn’t aid all economic groups are incorrect.
“Virtually every tax return received a tax cut as a result of the 2001 and 2003 Bush tax cuts.  Even many tax returns at the very bottom of the income scale that paid no income taxes to the IRS saw an increase in their refundable credit amount.”
The argument that tax increases reduce budget deficits lacks substantiation.  Alvin Rabushka, writing for the Hoover Institute, noted that between 1950 and 1992, total federal receipts rose from $39.4 billion to $1.09 trillion.  Total spending over the same period increased from 42.6 billion to 1.38 trillion.
“Deficit reducing tax increases in particular, show no perceptible impact on deficit reduction;  indeed, they appear to have the perverse effect of increasing future deficits.”  Tax increases retard economic development which eventually increases the deficit.
In the final analysis, tax revenue will never be sufficient if federal spending is unchecked, and if the economic activity upon which it is based is unhealthy. Domestic non defense spending growth over the past eighty two years reached a peak rate of increase in the past several years–a self defeating treadmill to nowhere.  At a time when unemployment continues to soar and the economy continues to stagger, significant tax increases are demonstratively counterproductive.

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NY Analysis

SOUTH CHINA SEA FLASHPOINT

Philippine President Benigno S. Aquino III warned Southeast Asian nations during April about Beijing’s increasingly aggressive posture in the South China Sea.  The area is becoming one of the most dangerous hotspots on the planet.

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   Despite talks going back to 2002, regional tensions have not only remained high but have continued to escalate.  China Brief has outlined a number of incidents. In 2009, Chinese vessels clashed with the American surveillance ship “Impeccable.” In 2010, although the United States maintained an officially neutral position (but with an increased area presence,) China informed the United States that it would not tolerate what it termed America’s “interference.” In 2011, Vietnam accused Chinese vessels of cutting cables on one oil survey ship and ramming the cables on another.
  Tense standoffs have occurred between Chinese and Philippine vessels, continuing into 2012.  Last month, three Chinese patrol boats confronted a Philippine naval ship near Scarborough Shoals in a dispute over fishing rights.
   A Foreign Policy report by Robert Kaplan describes the South China Sea as the “future of conflict” in the world.  The reasons are clear.  For the first time, China’s land borders are secure, allowing it to concentrate on expanding its influence abroad.  The shipping that supplies a resource-hungry planet moves significantly through the region, which in itself is a future source of energy exploitation.  Kaplan notes that “more than half the world’s annual merchant fleet tonnage passes through…and a third of all maritime traffic.”  Indeed, more than six times the oil that passes through the Suez Canal and seventeen times that which passes through the Panama Canal transits the South China Sea’s choke points.
   Beijing, thirsty for energy assets and with a newly powerful navy, maintains that it has sovereignty over almost all of the South China Sea, contradicting the claims of other area nations and in defiance of the United Nations Law of the Sea.
   The BBC reports that Chinese officials base their claims on the explorations of Chinese navigators in ancient times, a concept not only refuted but mocked by others.  Last February, Lt. General Juancho Sabban of the Philippine Armed Forces’ Western Command noted in a BBC interview, “By the same logic, Filipinos travelled to China centuries ago, so the Philippines should be able to claim some of China.”
  China’s claim is ironic, at best.  The last standing of the great Communist powers is using, essentially, a type of historical imperialist act that it has universally condemned in other nations to justify its own actions.
   Beijing has not been cooperative in attempts to negotiate the issue through regional talks, preferring to deal separately with each national claimant, a tactic that allows it to use armed intimidation as an effective tool. On April 28, China’s General Luo Yuan said his nation should be prepared for “war at all costs” to enforce its claims, according to a commentary posted onchina.org.cn. China has rejected attempts to litigate the matter before the International Tribunal on the Law of the Sea.
  
  The problem can be seen most clearly in the heated territorial disputes between Manila and Beijing. While disagreements between the two nations have existed for some time, the rise of China’s armed forces and the sharp reduction of the American Navy have transformed the problem from a political argument between diplomats to a military flashpoint between warships. As 2011 drew to a close, The Jakarta Post reported  on an Indonesia Center of Democracy, Diplomacy and Defense study noting an escalated naval presence in the South China Sea that included 27 Chinese vessels, 26 from Taiwan, two from Malaysia and one from the Philippines.
   Two particular areas, the Spratly Islands and the Scarborough Shoal, are the focus of an inflammatory disagreement between Manila and Beijing. They have, as noted by the CIA, no indigenous population, but rest in strategic waters relatively close to the Philippines.
  As noted in an April Congressional Research Service Report written by Thomas Lum, “In 2011, Chinese naval forces reportedly harassed Philippine fishing and oil exploration vessels and erected structures in disputed waters of the South China Sea near the Philippine island of Palawan…The Philippine government has demanded that Beijing negotiate a code of conduct and settlement of claims with the principal regional body, the Association of Southeast Asian Nations (ASEAN.)”  Philippine President Aquino increased his nations’ paltry defense budget (about 0.9% of GDP, according to CIAestimates,) and called for more U.S. assistance.
   The over 100 Spratly Islands are a resource-rich region claimed in whole or part by The Philippines, China, Taiwan, Vietnam, and Malaysia. Brunei also claims some portions of the abundant fishing grounds in the area.  Similarly, The Scarborough Shoal is also a resource prize.  The Georgetown Journalhas reported that estimates of at least 7 billion barrels of oil (at least 80% the capacity of Saudi Arabia) and up to 900 trillion cubic feet of natural gas lay in the region. The Congressional Research Service report notes that the oil and natural gas reserves lie within the Philippines’ 200 mile Exclusive Economic Zone, although China has also laid claims to them.
   The Obama Administration has refused to officially back Manila’s rights to the Spratlys and Scarborough Shoal, but has engaged in joint regional exercises with the Philippine armed forces (AFP) a position consistent with that of its predecessors.  At a joint meeting in Washington on April 30 that included U.S. Secretary of State Hillary Clinton, Defense Secretary Leon Panetta, Philippines Foreign Secretary Albert del Rosario, and Philippines Defense Secretary Voltaire Gazmin, Clinton stated:
   “We both share deep concerns about…recent tensions in the South China Sea…In this context, the United States has been clear and consistent.  While we do not take sides on the competing sovereignty claims to land features in the South China Sea, as a Pacific power we have a national interest in freedom of navigation, the maintenance of peace and stability, respect for international law, and the unimpeded, lawful commerce across our sea lanes.  The United States supports a collaborative diplomatic process by all those involved for resolving the various disputes that they encounter.  We oppose the threat of force or use of force by any party to advance its claims.  And we will remain in close contact with our ally, the Philippines.”
  Tensions sparked by China’s aggressive actions in the South China Sea have sparked a review of the inadequate strength of the Philippine Armed Forces (AFP.)   The AFP is among the weakest in the world for a nation of its size-ranked 140th in strength by the CIA. Manila’s Defense Secretary Gazmin believes China has singled out the Philippines for particularly harsh treatment because of its weak military, according to a report in the Philippine Daily Inquirer. The military of its chief external opponent, China, (there are ongoing internal indigenous issues as well) is among the worlds’ most powerful. As recently analyzed in The NY Analysis of Policy & Government, Beijing’s maritime strength is rivaled only by the US Navy in power. China’s submarine force is nearly double that of America’s. By 2015, its total fleet will be larger than that of the U.S. Navy.
  In April, Manila appealed to Washington for help in improving the woefully inadequate condition of its armed forces. Foreign Secretary del Rosario was candid in his assessment of the Philippines’ inadequate military, and urged the United States to step up its military assistance.  Last month, as part of a regularly scheduled series of exercises, U.S. and Philippine forces engaged in a joint training maneuver entitled Balikatan 28.  Not unexpectedly, Beijing took offense.
  The South China Sea will remain a dangerous flashpoint, made more perilous by the reduced size of the U.S. Navy and the inability of regional nations to counter China’s military prowess.

Categories
NY Analysis

Illegal Immigration

Illegal immigration is one of the most complex problems facing Americans.  Since the onset of the current “Great Recession,” the financial impact of the issue on federal, state and local budgets, and the implications for the job market, have made the topic more crucial than ever.  

 

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The Supreme Court
 
    As this report goes to press, The United States Supreme Court is preparing to hear the intense conflict between the Obama Administration and the State of Arizona over that state’s 2010 law intended to combat illegal immigration.  Governor Brewer has stated she will be in attendance at the proceeding.
    The statute in question requires police to check the immigration status of individuals stopped for other reasons.  It also makes it illegal for immigrants lacking a work permit to seek employment. Supporters of the legislation point to the tidal wave of unauthorized immigrants, the failure of the federal government to provide adequate oversight of the border, and the costs of providing services to illegal immigrants.  Opponents claim only the federal government has authority in this area, and that the measure may lead to profiling of Hispanics.
    A variety of states have enacted their own measures, mostly acting out of frustration with the federal government’s failure to adequately address the issue, as well as concerns over the cost of educating and providing medical care to illegals.  According to the National Conference of State Legislatures, thirty states have considered 53 omnibus bills.
   The Mexican government has filed an amicus brief, contending that the state measure constituted “an imminent threat to Mexico-U.S. bilateral relations.”  (In May of 2010, the Obama Administration and the Mexican government issued a joint declaration “Concerning 21st Century Border Management.”  The document, which is not legally binding, established a bilateral executive steering committee to further lawful trade, and curb the illegal flow of people and goods.)
    The Supreme Court’s ruling will probably be issued in June. Continuing its ongoing dispute with the Supreme Court, the Democrat Party is planning to contest the Court’s decision through new legislation if it rules against the White House position, according to the Washington Post. While the move is geared to shoring up support among some Latino voters, the move may backfire in the upcoming general election.  Rasmussen reports that 59% of the public supports automatic immigration checks during routine traffic stops, a type of enforcement that cannot be performed by federal authorities.
 Interestingly enough, the Obama administration hasn’t launched attacks on “sanctuary” jurisdictions that defy federal law by not reporting illegals that come to the attention of local officials.
Statistics
 
  The federal Office of Immigration Statistics reports that the number of illegal immigrants has grown by 27.5% since the year 2000, jumping from 8,460,000 to 11,200,000. The number is even more significant when compared to the mere 3.5 million present in 1990.   However, since 2005, the number of apprehensions by Department of Homeland Security’s Border Patrol has declined from 1,189,000 to only 340,000 in 2011.
    In fact, border apprehensions in 2011 were at their lowest level since 1972. 86% of those caught last year were male, up from 82% in 2005.   Despite the challenge represented by these statistics, the Obama administration has requested a decrease of 4% in the budget for Immigration and Customs Enforcement (ICE).   The White House has also requested a reduction of $17 million in the Section 187(g) program, which allows Washington to authorize state and local law enforcement agencies to carry out immigration enforcement duties, as noted in testimony before Congress by ICE Director John Morton on March 8.
  According to the Federation for American Immigration Reform, “Illegal immigration costs U.S. taxpayers about $113 billion a year…At the federal level, about one third of outlays are matched by tax collections from illegal aliens.  At the state and local level, an average of less than 5% of the public costs associated with illegal immigration is recouped through taxes collected from illegal aliens.”
 The ongoing Great Recession has caused what will probably be a temporary suspension in the growth of the number of illegal aliens present in the U.S., as many frustrated over the lack of work opportunities have voluntarily left.
Crime and National Security Issues
 
 The Violent Crimes Institute calculates that 240,000 illegal immigrants are sex offenders.  Rep. Peter King (R-NY) has produced a study noting that twelve Americans are murdered each day by illegal aliens.  It has been contended that even those not personally inclined towards lawlessness are vulnerable to being forced into crime by criminals preying on their vulnerability.  Concern has been expressed that terrorists mingling in with illegals crossing the border for jobs present a significant national security threat.
  A Heritage Foundation study concluded that “The real problem with undocumented workers is that flouting the law has become the norm, which makes the job of terrorists and drug traffickers infinitely easier.”
Health Care
 
   The impact on health care is a crucial part of the illegal immigration debate.  In June of 2007, a number of Congressional Representatives, including several who are also physicians, wrote to the Department of Homeland Security and the Centers for Disease Control and Prevention to express their concern over the communicable diseases illegals may carry.  Unlike legal immigrants, illegals are not subject to a health examination as part of the process for obtaining a green card.
   “It is not a surprise,” the Representatives wrote, “that the rate of TB infections is highest in the states that attract the most illegal immigrants…In addition to TB, we should be concerned about the many other diseases thought to be nearly eradicated in the United States that could be brought back through unchecked immigrants, including hepatitis B, polio, and avian flu, just to name a few…illegal immigration is a serious health threat to American citizens.”
   In 2008, an analysis by the Republican Study Committee calculated that one sixth of the total number of those without medical insurance were illegal immigrants.
The Workforce
 
   Approximately 8 million illegals are in the nation’s workforce.  Philip Valentine cites a Maricopa County study performed by economist George Borjas that indicates wages for entry level workers are approximately 4.7% less due to the impact of those illegals.  Mark Kirkorian, writing in National Review, argues that there has been no proof that illegal immigrant labor has produced any net economic benefit to the nation.  He maintains that self-serving employers seeking access to labor at costs below what Americans would accept is the motive for many who continue to “turn a blind eye” to this issue.
   Others, however, believe that illegal immigrants produce unacknowledged benefits to the nation.  Former Federal Reserve Chair Alan Greenspan’s 2009 testimony to the U.S. Senate Subcommittee on Immigration, published on the Pro/Con site, outlines this perspective:
  “There is little doubt that unauthorized, that is, illegal, immigration has made a significant contribution to the growth of our economy.  Between 2000 and 2007, for example, it accounted for more than a sixth of the increase in our total civilian labor force…unauthorized immigrants serve as a flexible component of our workforce, often a safety valve when demand is pressing and among the first to be discharged when the economy falters.  Some evidence suggests that unskilled illegal immigrants (almost all from Latin America) marginally suppress wage levels of native-born Americans without a high school diploma, and impose significant costs on some state and local governments.  However, the estimated wage suppression and fiscal costs are relatively small, and economists generally view the overall economic benefits of this workforce as significantly outweighing the costs.”
  The Cato Institute also disputes concerns about the economic impact of illegal immigrants.  They argue that most jobs taken by illegals are unskilled, appealing only to the 7% of native-born Americans who lack a high school diploma. The organization has urged the federal government to refocus its border control efforts towards criminals and terrorists.
Politics
 
  Democrats seek to leave the enforcement task to the federal government, to the relative exclusion of the states. They emphasize tougher restrictions on employers who hire illegals, and are more inclined to consider amnesty for illegals who have been in the nation for a prolonged period of time.
  Republicans advocate far tighter border controls, and oppose amnesty. Rep. Lamar Smith (R-Texas) has objected to the Obama Administration’s “backdoor amnesty” actions.
 Both sides have forwarded positions (for example, the various versions of the DREAM act) that attempt to address the needs of those who entered with their parents at an early age and have not known life in any nation but the USA.
Conclusion
 
   It is evident that the high rate of unemployment, budget deficits at the federal, state and local levels, and the threat of terrorism will continue to place America’s porous borders and the presence of a large illegal population at the forefront of public debate.

Categories
NY Analysis

America’s Crisis at Sea

The Obama Administration responded to critics of its downsized military budget (see NY Analysis, 2/23/12) with statements that it was maintaining resources on the most likely threats, especially in the Pacific region.  It pledged to provide adequate funding both to protect U.S. interests and reassure America’s allies.  To accomplish this, the White House emphasized that the Navy would be given preferential treatment.

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Concerns for maintaining the size of the fleet include not only the traditional challenges faced by America’s seagoing defense, but the highly worrisome naval power China has developed over the past decade.
Details indicate that the Navy was not spared, after all.  President Obama is calling for a 1.7% reduction from the Navy’s 2012 baseline appropriation, according to The Navy Times.  Starting with force numbers that are drastically reduced (down from 600 ships in the 1990’s to just 284 currently) the Navy will likely see further cuts in projected replacement and modernization programs. Additionally, accounting gimmicks are used that will provide “long term delays” rather than cancellation of new construction. This allows the Administration to respond to critics who say that the force has become too small by saying that replacement programs remain alive, even though they are extensively delayed. Despite assurances, the fleet size, under the current budget, could actually shrink to about 280 by 2017.
Despite widespread agreement that a 313 ship force is the bare minimum necessary for the Navy to protect the U.S., the current budget pegs the maritime force at only 280–285 vessels through the next five years.  Even that figure can’t be guaranteed, since age, accident, or hostile action could produce losses. 16 planned ships will be cut from the five year budget plan. According to a Navy League Report, a 20% cut in the number of warships scheduled to be built is planned. Further, according to the Department of Defense, procurement of the F-35 Fighter aircraft will be reduced by “nearly 50%,” in addition to the elimination of six Marine TACair squardrons. The need to replace the Navy’s aging fighter aircraft was recently emphasized by the crash of an F-18 F/A in Virginia, a disaster that early reports indicate may be due to the advances age of the aircraft.
To soften the public relations impact of cuts to a force that even the President emphasized needed to be protected from the budget crisis, each reduction is rationalized with accounting techniques that term the changes mere delays.  Examples from the Department of Defenses’ related budget proposal statement include:
·
           The ordering date of the planned aircraft carrier (CVN 79) hasn’t changed, but “The construction schedule will be moved back two years.”
·       Landing Craft Assault class vessels will (eventually) remain the same in number, but “procurement will be slowed.”
·       Amphibious Assault Ship (LHA) construction will be moved from FY 2016 to 2017.
·       The guided missile cruiser force won’t be cut—but nine ships will be “retired early.”
·       The development program for OHIO class subs will continue, “but at reduced levels.”
An objective analysis of the threat level justifies a fully funded Navy.  The Congressional Research Services’(CRS) recent report, China Naval Modernization: Implications for U.S. Navy Capabilities, stresses that Beijing’s maritime modernization effort “has emerged as a key issue in U.S. defense planning.  The question is of particular importance to the U.S. Navy, because many U.S. military programs for countering improved Chinese military forces would fall within the Navy’s budget.”
China’s submarine force is nearly double that of America’s. By 2015, its total fleet will be larger than that of the U.S. Navy.  Chinese naval units have already harassed US Navy vessels.  While Washington discusses how deep to cut the defense budget, China continues its pattern of increasing spending by an average of 16.2% annually, according to the Asian Defence publication. That figure may only be the tip of the iceberg. The Pentagon has charged Beijing with hiding its real military spending. The CRS noted that even “in the absence of …conflict, the U.S.-Chinese military balance in the Pacific could nevertheless influence day-to-day choices made by other Pacific countries, including on whether to align their policies more closely with China or the United States.”
China began its ambitious naval modernization in the 1990s.  Sinodefence reports that the 225,000 man “People’s Liberation Army Navy” is organized into three fleets: North Sea, East Sea, and South Sea.  Each consists of surface and submarine forces, naval aviation, and coastal defense forces.
Beijing’s effort has been successful in every way.  Powerful and effective anti-ship ballistic missiles (ASBMs), submarines, and surface ships have been developed, along with well trained, highly professional and capable crews.
The high caliber and impressive size of Beijing’s naval force clearly indicates that its goals extend beyond mere self defense and the imposition of its claims against Taiwan.  They include  China’s expansive and controversial claims far beyond its legitimate borders, the expansion of its international influence, and the solidifying of its role as a global superpower, particularly in the Pacific, where, according to CRS, it seeks to displace U.S. influence.  The Department of Defense notes that “China’s rise as a major international actor is likely to stand out as the defining feature of the strategic landscape of the 21st Century.”  While serving as Chairman of the Joint Chiefs of Staff, Admiral Michael Mullen  noted in June of 2010 that he was “genuinely concerned” about Beijing’s military might.
China’s technologically advanced naval weaponry combined with its aggressive posture render  it a greater threat to the U.S. than that of the former Soviet navy.  Devices than can disable seaborne electronics from a significant distance, as well as its development of revolutionary “anti ship ballistic missiles,” combined with satellites that provide excellent targeting data, give Beijing the tools to win conflicts at sea, when combined with China’s growing conventional navy.
China has developed its naval power to achieve a number of goals.  In addition to supplanting U.S. influence at sea and intimidating Taiwan, it has committed incursions into Japanese waters, and laid claim to oceanic resources of several other nations such as Vietnam, the Philippines, South Korea and India.  Recently, a worried South Korean military official was quoted in The Chosun Iibo, noting: “We need to establish a new security strategy by looking into a wide range of military partnerships with China as well as strengthening our alliance with the U.S.”  (The China Reform Monitor  reports that China will include Leo Island, controlled by South Korea, in its regular maritime patrols, and would deploy its first aircraft carrier there in August.)

Undisputedly, America’s maritime interests and those of its allies are clearly endangered by China’s dynamic new naval might.  The White House publicly recognizes the threat, but has failed to fulfill its commitment to counter it with adequate resources.

Categories
NY Analysis

State Budget Crisis

Much attention has recently been paid to the out-of-control federal deficit.  But there has been a relative lack of focus on the crisis facing individual states, whose current enacted budgets account for almost $667 billion in general fund expenditures, with a collective $95 billion shortfall in 2013, as reported by the National Governors Association.

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   In 2012, According to the Center for Fiscal Accountability:

   “As of March 2011, state and local government had an outstanding debt of $2.447 trillion.  Furthermore, state and local governments are facing a $3.1 trillion shortfall in projected pension spending-a shortfall of $21,500 for every U.S. household.  These liabilities are government worker pension promises that outpace the size of financial assets held by state and local governments.  State and local governments’ unfunded liabilities comprise a massive 22 percent of GDP. However, the true $3.1 trillion cost of state and local government promises continues to be masked with accounting gimmicks.”
   The American Legislative Exchange Council reaches a similar conclusion, stating that “Bloated state spending levels and trillions of dollars in unfunded government employee pension liabilities pose huge financial obstacles to economic recovery in the 50 states today…a vast majority of states have set themselves up to fail by spending beyond their means…Rapid growth in per capita spending, a lack of economic freedom, and weak balanced budget rules caused the budget gaps.  The recession just exposed these underlying problems…from 1985 to 2005, most state budgets doubled, and some tripled, in size. In the past decade alone, state and local budgets grew 90 percent faster than the private sector’s Gross Domestic Product.”
   The future for state budgets appears to be challenging. According to theStatelines report, “State of the States 2012,” “As a result of last summer’s deal to raise the federal debt ceiling, and the consequent failure of the Congressional ‘super committee’ to decide on budget cuts, states are bracing for automatic across-the-board cuts in education, social welfare and other programs for the upcoming 2013 fiscal year…More than 150 grant programs that send money to states could get cut…if…’sequestration’ occurs…federal aid to states could drop by nearly $9 billion in fiscal 2013.’ The Center on Budget and Policy Priorities is concerned that the conclusion of the federal stimulus program will place a heavy burden on state budgets.  A 2011 study entitled “Rich States, Poor States” stresses that “states that took federal stimulus money also agreed to ‘maintenance of effort’ provisions, which prohibit them from downsizing many programs going forward, compounding the problem.”
   Hovering all of the prospects for the future of state budgets is the specter of Obamacare.  The National Governor’s Association believes that related unfunded mandates will impose new costs of $118 billion through the next decade.
   There are some bright spots. The National Conference of State legislaturesreports that fiscal conditions are improving at a slow pace, although tax collections remain well behind pre-recession levels. Four states, California, Missouri, New York and Washington, have reported budget gaps since the start of the prior fiscal year, an improvement over the 15 states with a similar issue the previous period.  The Rockefeller Institute reports that 45 states saw their revenues increase over the prior year.
Case Study:  New York State’s 2012-2013 Budget
   In 2011, New York had the third highest cost of government per day in the nation, according to the Americans for Tax Reform Foundation.
   New York State’s 2012-2013 $132.6 billion state budget, at first glance, appears to be a more rational approach to the “Empire State’s” fiscal challenges than its predecessors.  It is, in fact, somewhat of an improvement, with a $135 million reduction from its immediate predecessor. A substantial part of that improvement results from the Governor’s signature accomplishment, the elimination of automatic spending hikes.  And, for the second time in a row, it was completed in time, after years of embarrassment in which legislators in Albany (the state capital) couldn’t come to terms until months after the legal deadline.
   But a closer examination reveals that although some progress was made, the basic problems remain unaddressed.
   On the surface, (and widely reported in the media) the budget cuts spending.  In reality, however, the portion of spending paid for totally from instate revenue (that’s state revenue minus federal aid) actually increased by 2%.
   All parties to the agreement (and again, widely reported in the media) proudly proclaim that no new taxes are in the budget.  Unfortunately, that’s inaccurate.
   Last December, taxes on upper income earners were increased by a whopping $1.5 billion.  Even before that, New York was the worst state in the whole nation in terms of individual tax rates, and was also one of the five worst states for tax increases in the 2003-2010 period.   (New York already had the highest top marginal personal income tax rate in the nation, at 12.62%, and the worst economic outlook in the nation, as reported by the American Legislative Exchange Council) Its’ major urban center, NYC, even has its own local personal income tax in addition to that imposed by the state.  There is, of course, a tendency to say that wealthier individuals can afford to pay the extra charge.  The problem is, they don’t have to.  Many will “vote with their feet” and simply move to a lower tax state. From 2000-2009, it was the biggest loser in migration of all 50 states. As a result, New York has been losing Congressional representation.
  The state’s onerous individual taxes are matched by the highest-in-the nation corporate tax rate of 15.95%, reports A.L.E.C.
  Political pandering is present in the budget.  One unacceptable gimmick relied on is the deferring of pension costs, in the indigestible amount of over $780 billion, for a decade.  This is an example of some Albany’s most irresponsible practices.  It does, however, allow legislators to keep public service employee unions at bay-and not coincidentally, prevents those unions from attacking incumbent legislators.
   To gain the support of New York City’s Mayor Michael Bloomberg, who has been generous with contributions to both Democrats and Republicans, funds are dedicated to a so-called “Close to home” initiative that allows NYC to take control of at-risk youth; currently, these young people are housed at less expensive upstate sites.  There is no convincing explanation of what benefits this provides, other than appeasing the mayor and other local NYC politicians.
  Education spending is increased, despite the fact that New York already spends far more per-pupil than any other American state.  According to the latest available statistics, Albany and local budgets provide $18,126 per student, dwarfing the national average of $10,499. Unfortunately, for all that extra funding (even accounting for the state’s higher cost of living) there is no indication that New York students’ dismal performance has benefited. One unacceptable gimmick the budget relies on is the deferring of pension costs, in the indigestible amount of over $780 billion, for a decade.  This is a throwback to the some of the worst practices Albany has used.
   Despite New York’s precarious economic condition, Albany continues to use taxpayer dollars to fund “pork barrel” projects (as reported in The Wall street Journal) and legislators continue to use taxpayer dollars in “official” newsletters that amount to little more than thinly veiled campaign literature.
Remedies
   It is manifestly evident that states cannot continue on the path that led to their current precarious position.  The American Legislative Exchange Council notes that a number of states have “reset” their budgets to 2007 or 2008 levels to accommodate the new financial reality.  Both liberal and conservative legislators acknowledge that fiscal solvency cannot be achieved with business as usual spending, particularly in the area of state employee costs.
   The Heartland Institute is advocating a 10 point program to address fiscal problems in the states:
  1. 1.     Keep taxes low.  The evidence is clear and has been for many years: High taxes hinder economic growth and prosperity.
  2. 2.     Don’t penalize earnings and investment.  Taxes on earnings and investment income are particularly harmful to economic growth.
  3. 3.     Avoid ‘sin’ taxes.  Taxes on specific goods and services are often unfair, unreliable and regressive.
  4. 4.     Create a transparent and accountable budget.  Focus attention and resources on providing those services that are the core function of state government.
  5. 5.     Privatize public services.  Privatization is a proven way to reduce government spending while preserving or improving the quality of core public services.
  6. 6.     Avoid corporate subsidies.  Subsidies to corporations and selective tax abatement are questionable politics and bad economics.
  7. 7.     Cap taxes and expenditures.  A tax and expenditure limitation protects elected officials from public pressure to spend surplus tax revenues during good economic times.
  8. 8.     Fund students, not schools.  States and cities that have experimented with school choice have seen gains in academic achievement.
  9. 9.     Reform Medicaid programs.  Spending on Medicaid can be brought under control without lowering the quality of care received by Medicaid patients.
  10. 10.  Protect state employees from politics.  State and local government employees should be prohibited from deducting funds used for political purposes from the paychecks of public workers.
   For far too long, state governments have employed every accounting device to provide popular but unaffordable benefits and services.  Governors and legislators have placed their own careers over the fiscal health of their jurisdictions. Their ability to do so any longer has come to an end, and painful but practical steps must be taken.

Categories
NY Analysis

Budget Battle

The dueling budgets presented by President Obama and Rep. Paul Ryan, (R-WI) neither of which is likely to become law, reflect an almost unprecedented divergence of views on the role of government, and the priorities of the American people.  The partisan tone was even contained in the official Budget Message of the President, which specifically criticized Republicans for not agreeing with the President’s proposals. The battle lines have become so stratified that the United States Senate hasn’t passed a budget in over a thousand days.

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   There is one figure that can’t be denied by either side:  America is in a deep fiscal crisis. Overspending has produced an almost unimaginable $15.566 trillion dollar deficit that continues to grow by leaps and bounds.  As noted in the Heritage Foundation Report, Saving The American Dream, “We have come to a time of decision…Our nation is going broke, and we are passing the costs of these misguided policies to our children and their children.”

   Over the first three years of the Obama administration, the deficit grew more than it did during the entire eight years when Bush occupied the White House. As noted by the Center for Fiscal Accountability, “Almost immediately upon his inauguration, President Obama signed into law the $787 billion American Recovery and reinvestment Act that-along with TARP-totals nearly $1.5 trillion in government growth for taxpayers…in 2009, the [federal] government spent $3.9 trillion dollars, and took in $2.1 trillion dollars in taxes.  That is, the government spent beyond its means by $1.8 trillion-almost as much as it takes in on a yearly basis.”  Further White House proposals continued the trend, which will double the size of the already deficit-laden federal budget within ten years.

   The nation now faces a perilous reality in which the debt is greater than the Gross Domestic Product.  That’s a classic definition of bankruptcy.

   There is almost nothing to show for the great national spending spree over the past three years.  Unemployment and underemployment remain at crisis levels. The economy is barely progressing. Inflation has become a significant problem. Infrastructure needs remain largely unaddressed (unlike the Great Depression, when programs such as the WPA and the CCC’s engaged in massive public works.) Our armed forces haven’t received badly needed equipment. Even the vaunted American Space Program has been mothballed.

   American families have suffered. Homes have lost unprecedented amounts of value. According to an ABC News report, “The S&P/Case-Shiller 20-city index through November showed home values fell 3.7 percent from the previous year. The 20-city home price index dropped slightly more than the 3.3 percent economists surveyed by Bloomberg had expected, weighed down by foreclosed properties.”  Here too, the President and Congress diverge sharply on the reasons.  The White House concentrates on the mortgage crash; the Republicans emphasize the depressed economy.

   President Obama’s proposed 2013 budget includes tax hikes that range from $1.5 trillion to $1.9 trillion (depending on whose estimates you use) over the next decade.  (This would produce tax revenues above the historical average of 18.3% of GDP, according to Heritage.) The Bush tax cuts would expire for upper income earners, and the US corporate tax rate would remain as the highest in the world,  although the White House has said it may introduce a measure to lower the rate  (to a figure”in the high 20s,” according to a Reuters report) at a future date.  The additional revenue would provide a 17.5% increase in revenue during the coming year. The additional funds would not be mainly devoted to reducing the deficit. They would be used for $2.7 trillion in increased spending, but at least one key area, defense, would still endure budget cuts. Under the President’s plan, the annual deficit would be about $900 billion.

Rep. Paul Ryan (R-WI) has introduced a radically different budget, which he calls a “Path to Prosperity.”  The core of his proposal is a return to 2008 levels of non-security discretionary spending, producing a “primary balance” (spending-interest payments=revenue) by 2015. The savings are achieved by repealing “Obamacare,” and ending what it identifies as duplicative or useless government programs, and stoping “corporate welfare” to politically-connected private companies.  The proposal locks in spending caps and budget process reforms, and converts Medicaid spending into a block grant to the states.

   Rather than administer drastic cuts to national security funding as is currently planned, Ryan would slightly increase spending on military needs. (Defense spending as a percentage of the budget has dropped from 25% thirty years ago to 20% currently.) In contrast, the President’s budget would get rid of what he describes as “outdated Cold War era systems.” This is largely a code phrase for furthering the White House push to unilaterally slash America’s nuclear deterrent, end the capability to fight on two fronts, and sharply reduce acquisition of replacements for worn out and outdated equipment, as well as reducing health benefits for active duty servicemembers.

   According to Ryan, the individual tax code would be simplified by attacking loopholes, lowering rates, and broadening the base of those who pay. The alternative minimum tax, originally designed for wealthy taxpayers but now a major problem for many middle class taxpayers, would be eliminated. America’s highest-in-the world 35% corporate tax rate would be reduced to 25%. Investment in our military would not be slashed, as is currently planned.

   Republicans emphasize that Ryan’s plan would reduce the 2013 deficit by $20 billion, and save up to $3.3 trillion over the next decade. They estimate that federal spending would be reduced from 23% of the economy down to 20%. They note that the White House’s “stimulus” spending did little more than reward politically-connected corporations.

   The dueling budget proposals reflect diametrically opposed political beliefs. The President continues to adhere to a plan that would use increased tax revenues and increased federal spending to address domestic needs and entitlement programs.  Human Events chides many of the President’s initiatives as “frivolous projects.”   The House of Representatives believes that growing the economy, promoting employment, lowering taxes and allowing more discretion to the individual states will allow the U.S. to emerge from the “Great Recession.”

   The fate of the nation hangs on which side is correct, and which side wins this battle of the budgets. But total victory for either side before the 2012 elections remains completely unlikely.

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Although Defense spending accounts for only 20% of the federal budget, The White House has targeted the armed forces (which have basically been deprived of adequate supplies of new equipment since the end of the Reagan era) to take 50% of all spending cuts. It has also been leaked that a radical and unilateral reduction in our nuclear defense posture is being considered.

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In his budget, Obama has rejected the long-held doctrine that the U.S. must be prepared to fight in two separate regions simultaneously. The possibility of a large scale conflict with a powerful adversary such as China or Russia apparently has been rejected.
The President also advocates a unilateral and unprecedented 80% reduction of atomic warheads.  This would place the U.S. in a distant third place, behind Russia with its 6,000 warheads and on a par with China, leaving America vulnerable to ongoing intimidation from either of these powers as well as outright nuclear blackmail.
The proposal lowers U.S. nuclear strength to 1950 levels.  Strategically, this means that a first strike by an adversary could easily wipe out our arsenal, leaving the nation with no choice but surrender.
As the President attempts to enact his plan, Russia continues an ambitious military modernization program. MILPLEX  reports that China will double its announced military budget within the next five years.  North Korea and Iran are also moving swiftly ahead with their nuclear weapons programs.
In a bizarre twist, The Obama budget also cuts funds from Homeland Security, while increasing aid to Islamic fundamentalists in Egypt.
Last week, a group of military experts assembled by former Assistant Secretary of Defense Frank Gaffney noted that while the proposed defense cuts will slash our military capability, civilian DOD personnel will not be affected.  In other words, the fat will be spared while muscle is cut.
In the past, proposals to substantially reduce our national security posture would face stiff Republican opposition.  This year, the Republican Party is diverted by a fierce presidential primary battle, and it is being influenced by a small group of isolationists led by Ron Paul.
The end result of this proposed reduction to military spending may well cost far more than it actually saves. The impact of 100,000 low paid soldiers, sailors, marines and airmen returning home with very few available jobs will produce more expense in unemployment checks and related benefits than will be saved.  The fragile industrial base may not recover from the loss of military contracts. Numerous contractors and subcontractors will be forced out of business, destroying the recession-proof tax revenue and jobs they produce. Many of these businesses will close forever, meaning that future administrations would be powerless to undo the harm this reckless attack on our safety would produce.  To cite just one example, it has been estimated that New York State alone will lose almost 27,000 jobs.

Historians remind us that it was the pre-World War Two defense buildup that actually began to end the Great Depression. Gambling with our national safety is a poor bet at any time; doing so in an era of economic crisis is even worse.