"We the people" tell the government what to do, it doesn't tell us. Our Constitution is a document in which "We the people" tell the government what it is allowed to do. "We the people" are free. Ronald Reagan Farewell Address 1989
John Boehner (R., Ohio): “The House did not take up the tax measure today because it did not have sufficient support from our members to pass. Now it is up to the president to work with Senator Reid on legislation to avert the fiscal cliff. The House has already passed legislation to stop all of the January 1 tax rate increases and replace the sequester with responsible spending cuts that will begin to address our nation’s crippling debt. The Senate must now act.”
Barney Keller, a spokesman for the Club for Growth: “We are pleased that the Republicans did not vote to raise taxes. We need to get real about our problems and stop playing political games. Only in Washington can a bill that increases taxes be considered a tax cut.”
Ezra Klein (Washington Post): “It’s not entirely clear whether Boehner will be the speaker of the House a month from today. The vote to elect the next speaker is on Jan. 3. To win, you need an absolute majority of the House, not a plurality. Even a hopeless conservative challenge that attracts only a handful of Republican votes could deny Boehner the speakership until a consensus candidate emerged. Tonight’s vote makes that challenge more likely.
A significant number of Boehner’s members clearly don’t trust his strategic instincts, they don’t feel personally bound to support him, they clearly disagree with his belief that tax rates must rise as part of a deal, and they, along with many other Republicans, must be humiliated after the shenanigans on the House floor this evening.
Worse, they know that Boehner knows he’ll need Democratic support to get a budget deal done. That means “a cave,” at least from the perspective of the conservative bloc, is certain. That, too, will make a change of leadership appealing.”
If a conservative spoiler runs, he or she could very possibly deny Boehner the 218 votes he needs to become speaker, clearing the way for a more moderate candidate like Eric Cantor to unite the party. It’s hard to say exactly how likely that is. But it’s likelier than it was, say, this morning.
Rep. Scott Rigell, a first-term GOP congressman from Virginia who sits on the House armed services committee, said Speaker John Boehner opened the Republicans’ Thursday evening meeting by saying it would be a quick conference and then took the unusual step of leading both a prayer and the Pledge of Allegiance. Mr. Boehner said the “Serenity Prayer,” Mr. Rigell said, but made no attempt to garner further support for his Plan B proposal.
Mr. Boehner had pushed the proposal, which would extend the Bush-era tax cuts for the first $1 million of income, as an alternative to reaching a broader deal with President Barack Obama.
“I knew they were having some trouble with the vote, but I had just assumed they’d say ‘Hey look, rally, let’s go.’ That did not happen,” Mr. Rigell said. “He said ‘We do not have the votes and we are not going to have any further votes and I’ll go before the press tomorrow and explain we don’t have the votes.’ ”
He added that a few members clapped, but that many were trying to process the sudden change of plans.
“I’m not sure the people who have been up here 20 or 30 years really understand what the next iteration of this process is,” Mr. Rigell said.
In a statement, Mr. Boehner said: “The House did not take up the tax measure today because it did not have sufficient support from our members to pass. Now it is up to the president to work with Senator [Majority Leader Harry] Reid on legislation to avert the fiscal cliff. ”
About the Speaker of the U.S. House of Representatives
The position of Speaker of the House of Representatives is created in Article I, Section 2, Clause 5 of the U.S. Constitution, which states, “The House of Representatives shall chuse their Speaker and other Officers; …”
How the Speaker is chosen
As the highest-ranking member of the House, the Speaker is elected by a vote of the members of the House. While it is not required, the Speaker usually belongs to the majority political party. The Constitution does not require that the Speaker be an elected Member of Congress. No non-member has ever been elected Speaker.
The Speaker is elected following each mid-term election held every-other year, and serves a two year term. Along with the title and duties, the Speaker of the House continues to serve as the elected representative from his or her congressional district, and takes part in debate and votes like all other representatives.
Powers duties and privileges of the Speaker
Typically the head of the majority party in the House, the speaker outranks the Majority Leader. The salary of the Speaker is also higher than that of the Majority and Minority Leaders in both the House and Senate.
The Speaker rarely presides over regular meetings of the full House, instead delegating the role to another representative. The Speaker does, however, typically presides over special joint sessions of Congress in which the House hosts the Senate. The Speaker exerts power over the legislative process by setting the House legislative calendar determining when bills will be debated and voted on.
The Speaker often utilizes this power to help fulfill his or her responsibility of making sure bills supported by the majority party are passed by the House. The Speaker also serves as chair of the majority party’s House steering committee.
Perhaps most clearly indicating the importance of the position, the Speaker of the House stands second only to the Vice President of the United States in the line of presidential succession.
The first Speaker of the House was Frederick Muhlenberg of Pennsylvania, elected during the first session of Congress in 1789.
Social Security Deficits are Permanent and Growing
The ‘fiscal cliff’ may sound like the name of an exercise retreat on a mountain top in Southern California, but the reality is not so pretty.
What ‘fiscal cliff’ actually refers to is the potentially dire economic situation the U.S. faces at the end of 2012.
The now infamous phrase was coined by Federal Reserve Chairman Ben Bernanke in February 2012, during one of his required appearances before Congress on the state of the U.S. economy. He described … “a massive fiscal cliff of large spending cuts and tax increases” on Jan. 1, 2013.
Since then, ‘fiscal cliff’ has taken on legendary status as a harbinger of economic gloom and doom.
So what does the ‘fiscal cliff’ trigger for the economy and how bad can it be? Here’s a look.
How does the fiscal cliff come about?
At midnight on Dec. 31, 2012, a major provision of the Budget Control Act of 2011 (BCA) is scheduled to go into effect. This was the deal signed by President Obama in August 2011 to end the Congressional battle over raising the government debt ceiling.
The Act was a compromise between Democrats and Republicans on economic policies while temporarily increasing the debt ceiling — the amount of money the government could borrow from itself to pay its bills.
The crucial part of the Act provided for a Joint Select Committee of Congressional Democrats and Republicans — the so called ‘Supercommittee ‘— to produce bipartisan legislation by late November 2012 that would decrease the U.S. deficit by $1.2 trillion over the next 10 years.
To do so, the committee agreed to implement by law — if no other deal was reached before Dec. 31 — massive government spending cuts as well as tax increases or a return to tax levels from previous years. These are the elements that make up the ‘fiscal cliff.’
What laws from the Budget Control Act will go into place?
Among them are the end of 2011′s temporary payroll tax cuts — the result of which will be a 2 percent tax increase for most workers.
There will also be an end to several tax breaks for businesses, and changes in the alternative minimum tax (AMT) that could result in more people having to pay — the income range is currently between $45,000 and $200,000 — and higher tax payments for those who do.
Several of these existing tax breaks came from the George W. Bush tax cut bill of 2001, which were extended under President Obama until the end of 2012.
There will also be tax increases for higher income individuals to help pay for the ffordable Health Care Act (so-called ObamaCare).
At the same time, spending cuts will take place in more than 1,000 government programs, including cuts in the defense budget as well as social programs like Medicare, through 2022.
But some programs are exempt from the BCA. Those are Social Security, federal pensions and veterans’ benefits.
What is the impact of the tax increases and budget cuts?
While higher taxes and spending cuts would reduce the U.S. budget deficit by an estimated $560 billion, the Congressional Budget Office (CBO) predicts that the policies from the BCA would cut gross domestic product by four percentage points in 2013. Many analysts say that would likely send the still-struggling U.S. economy into a recession, if not a depression, as the financial markets would likely go into a tailspin while businesses and consumers both cut back on spending.
As a result of the economic slowdown from the stilted GDP growth, the CBO also predicts unemployment would rise by almost a full percentage point, with a loss of about two million jobs.
Can anything be done to prevent the ‘Fiscal Cliff’ from happening?
The major problem has been getting Republicans and Democrats in Congress and the White House to agree on budgetary policy for the future. epublicans say they want cuts in government spending to reduce the country’s deficit without raising taxes. For their part, Democrats say they want spending cuts with certain taxes raised.
There have been calls to extend some or all of the tax cuts and to replace the massive cutbacks in government spending with more targeted reductions. Some proposals include repealing the BCA altogether and just keeping what exists now until another agreement can be reached.
But so far, there is no consensus on what to do, and some analysts say nothing might happen to avoid the ‘fiscal cliff’ until the last week in December.
There is one ace in the hole, so to speak. Even if the BCA deadline comes and nothing is done, Congress can still act to change laws retroactively if it chooses.
“God grant me the serenity to accept the things I cannot change,”
The Oklahoma City bombing in 1995 and the attacks of September 11, 2011 will forever be etched in our collective memory and forever serve as painful reminders that the enemies of freedom are many and our security often comes at a steep price—in dollars, lives and liberty.
We no longer can assume our distant shores from foreign lands or having the greatest military force in the history of the world are enough to protect us. We now live with the reality terrorists are within our midst and they may look, sound and act like us, but they hate everything we are and the values we share.
The balancing act between liberty and security has been tenuous throughout the history of our nation, founded upon basic freedoms granted by our Creator and protected from government infringement within the Bill of Rights of our Constitution.
But a new element has been added to this equation over the past decade that threatens to undermine both our liberty and security—excessive government spending and insurmountable debt.
We cannot secure liberty and guarantee security simply by spending more and more money in the name of security.
Every dollar misspent in the name of security weakens our already precarious economic condition, indebts us to foreign nations, and shackles the future of our children and grandchildren. Our $16 trillion national debt has become the new red menace not only lurking in our midst, but created and sustained by shortsighted and irresponsible decisions made in Washington.
We can only defend our freedoms by ensuring the dollars we spend on security are done so in a fiscally responsible manner, meet real needs, and respect the very rights we are aiming to preserve and protect.
This report, Safety at Any Price, exposes misguided and wasteful spending in one of the largest terror-prevention grant programs at the Department of Homeland Security – the Urban Area Security Initiative (UASI).
We cannot assume that because the UASI program has an important mission and a large budget it is accomplishing its goals, however.
Significant evidence suggests that the program is struggling to demonstrate how it is making U.S. cities less vulnerable to attack and more prepared if one were to occur—despite receiving $7.1 billion in federal funding since 2003.
After ten years, a clear danger for the Urban Areas Security Initiative (UASI) grant program is that it would be transformed from a risk-based program targeting security gaps into an entitlement program for states and cities.
My office has conducted a year-long inquiry into the this grant program found that to wide of latitude is given to states and urban areas to determine the projects they will fund, and program parameters defining what constitute allowable expenses are extremely broad.
Congress and DHS failed to establish metrics to measure how funds spent through the UASI program have made us safer or determine the right amount to dedicate to counterterrorism programs to mitigate the threat.
While DHS recently established its first National Preparedness Goal, it has yet to develop a robust assessment of the nation’s current preparedness capabilities or defined performance metrics to assess the effectiveness of federal expenditures made to date.
If in the days after 9/11 lawmakers were able to cast their gaze forward ten years, I imagine they would be surprised to see how a counter-terrorism initiative aimed at protecting our largest cities has transformed into another parochial grant program.
We would have been frustrated to learn that limited federal resources were now subsidizing the purchase of low-priority items like an armored vehicles to protect festivals in rural New Hampshire, procure an underwater robot in Ohio and to pay for first responder attendance at a five-day spa junket that featured a display of tactical prowess in the face of a “zombie apocalypse.”
As we prepare to mark the tenth anniversary of the creation of the Department of Homeland Security in November, the time has come for Congress to reconsider DHS’s mission and approach to counterterrorism.
We must be honest with the American people that we cannot make every community around the country invulnerable to terrorist attacks by writing large checks from Washington, D.C. Not only is this an unrealistic goal, but it also undermines the very purpose of our efforts.
By letting every level of government – federal, State and local – do the things each does best, we can secure our cities and our freedoms. Confusing these roles, as we have done with UASI, leads to waste, inefficiency and a false sense of security.
We must rededicate ourselves to ensuring that every dollar the federal government spends on terrorism prevention programs is spent wisely, yielding the largest improvement in security and best return on investment for your tax dollars.
Facing a $16 trillion national debt, Congress needs to have a conversation about what we can afford to spend on the Department of Homeland Security’s terrorism prevention programs and where to spend it.
The American people recognize and understand the limits we face. They understand that we should never sacrifice all of our freedoms in the name of security.
We similarly cannot mortgage our children and grandchildren’s future by funding unnecessary and ineffective programs, even including those that have important missions.
Sincerely,
Tom Coburn, M.D.
U.S. Senator
Introduction
American cities have long been symbols of strength, freedom, progress and ingenuity, representing some of the best our nation has to offer. The threat of an urban terror attack, however, has made many feel less safe than they used to. While most of our cities have never been struck from the weapons of terrorists, we know the possibility is a real one.
In 1995, the bombing of the Alfred P. Murrah Federal Building in Oklahoma City, Oklahoma, which killed
168 people and injured more than 800,showed our nation the horrors of a terror attack in a major city. In the years that followed, attempted terrorist attacks like at the Seattle millennial celebration in 1999 were thankfully disrupted by law enforcement authorities.
Of course, everything changed when New York City and Washington, D.C. were attacked in 2001. Americans understood that an organized enemy was plotting and attempting spectacular terrorist attacks in American cities.
For the past ten years, Americans have struggled to know just how to respond—including our leaders and elected officials. Sensing that many major cities were not fully prepared for another September 11th style attack, Congress gathered more than 20 agencies into a new Department of Homeland Security (DHS).
DHS was tasked with managing several grant programs, including the Urban Area Security Initiative (UASI). UASI was one of several new federal programs aimed at ramping up preparedness and closing security gaps in major cities that were most at-risk.
UASI grants were designed to be start-up investments to help the most vulnerable urban areas enhance both their readiness and response capabilities. Officials in one urban area said it was well known that the grants were “seed money” and “everyone knew [federal] money would not be around forever.” Success for the UASI program, therefore, would be defined by it growing less needed, not more. DHS has since spent an estimated $35 billion on its grant programs over the past decade,4 including $7.144 billion for UASI Urban areas.
After a decade in operation and many billions spent, it is unclear to what extent UASI and other DHS grant program have made our nation’s cities safer and more prepared. The question was given added urgency by this year’s significant reduction in the program’s funding and size.
Having grown rapidly from an early focus on seven major cities to as many as 64 in recent years, budgetary realities trimmed it back to 31 for 2012.
Large and small cities alike have been lobbying to get the funds restored to formerly high levels. This is especially true for cities that saw their funds dry up and aren’t traditionally considered the targets of terrorists, like Riverside, California; Bridgeport, Connecticut; Baton Rouge, Louisiana; Toledo, Ohio; Richmond, Virginia; Albany New York; and San Juan, Puerto Rico.
This report examines the UASI grant program, including a detailed review of 15 cities that have received funding through the program. It is intended to assess whether spending on DHS antiterrorism grants like UASI have made us safer, and whether the taxpayer dollars that have been spent on these programs have yielded an adequate return on investment in terms of improved security.
The results of the investigation find that taxpayer money spent on homeland security grant programs has not always been spent in ways obviously linked to terrorism or preparedness. Importantly, this does not mean money was spent outside the bounds of what was allowed. The decision by officials in Michigan to purchase 13 sno-cone machines and the $45 million that was spent by officials in Cook County, Illinois on a failed video surveillance network have already garnered national attention as examples of dubious spending. Both were defended or promoted by DHS.
Other examples have not received as much attention. Columbus, Ohio recently used a $98,000 UASI grant to purchase an “underwater robot.”6 Local officials explained that it would be used to assist in underwater rescues.
Keene, New Hampshire, with a population just over 23,000 and a police force of 40, set aside UASI funds to buy a BearCat armored vehicle. Despite reporting only a single homicide in the prior two years,7 the City of Keene told DHS the vehicle was needed to patrol events like its annual pumpkin festival. Tulsa, Oklahoma used UASI funding to harden a county jail and purchase a color printer.
In 2009, Pittsburgh, Pennsylvania purchased for $88,0009 several “long-range acoustic device,” or LRAD, which is mounted on a truck and emits an ear-splitting sound. Local officials used it to disperse G-20 protestors, giving one bystander permanent hearing loss, but which they called “a kinder and gentler way to get people to leave.”
Peoria, Arizona spent $90,000 to install bollards and surveillance cameras at the Peoria Sports Complex, which is used for spring training by the San Diego Padres and Seattle Mariners. The Oxnard-Thousand Oaks UASI used $75,000 to also purchase surveillance equipment, alarms and closed-circuit television, which it installed in its Civic Arts Plaza, a local theater and cultural center.
UASI funds were also used for mundane expenses, such as paying the overtime costs of police and firefighters or purchasing new computers for the local emergency planning office. Some urban areas used their awards for local outreach, holding conferences, creating websites and posting videos on how citizens can spot signs of terror in their own neighborhoods. A video sponsored by the Jacksonville UASI alerted its residents to red flags such as people with “average or above average intelligence” or who displayed “increased frequency of prayer or religious behavior.”
When asked, FEMA could not explain precisely how the UASI program has closed security gaps or prepared the nation in the event of another attack. In part, FEMA has done very little oversight of the program, allowing cities to spend the money on almost anything they want, as long as it has broad ties to terror prevention.
In fact, according to a June 2012 report by the Department of Homeland Security Inspector General, “FEMA did not have a system in place to determine the extent that Homeland Security Grant Program funds enhanced the states’ capabilities to prevent, deter, response to, and recover from terrorist attacks, major disasters and other emergencies before awarding more funds to the states.” Moreover, the agency failed to
issue preparedness goals, intended to shape the use of UASI funds, until last year—nine years after the program was created. Because of this, it is difficult to measure the gains with any specificity.
Any blame for problems in the UASI program, however, also falls on Congress, which is often more preoccupied with the amount of money sent to its cities than with how the money is spent, or whether it was ever needed in the first place. With so few accountability measures in place, there is almost no way to ensure taxpayers are getting value for their money, and more importantly, whether they are safer.
This report is a first step in identifying some of the problems that have developed with the UASI program in its first decade, as Congress and the administration consider reforming DHS grant program. In February 2012, the Department of Homeland Security proposed consolidating 16 homeland security grant programs, including the Urban Areas Security Initiative (UASI), into a single “National Preparedness Grant Program.”12 This proposal, to which the administration would dedicate $1.54 billion, would be a major change in how the department uses federal resources to buy-down risk.
Given our nearly $16 trillion national debt, and the federal government’s many competing responsibilities, it is important that Congress carefully consider what we can afford and what investments on anti-terrorism programs will yield the best return on investment in terms of improved security. Before Congress embraces a consolidation plan, and allocates another $35 billion14 in homeland security grants, it is essential that DHS’s address the difficulties it has had to this point implementing the Urban Areas Security Initiative (UASI) and other DHS grant programs.
Conclusion and Recommendation
As part of the agency’s grant program reorganization, DHS needs to address how the agency will continue to meet is mission to provide funding to areas with the highest risk of terrorist attacks. The agency will also need to demand that the local and state partners conduct better oversight over the federal funds that they are in charge of managing.
Finally, DHS needs to implement a systematic approach to define and measure the preparedness capabilities it desires, and then assess whether those capabilities are being achieved as effectively and efficiently as possible.
More than ten years after 9/11, the federal budget realities of the United States does not allow us to assume that any taxpayer dollar spent in the name of preparedness is a dollar well spent. Since the list of needs will always exceed the money available, we have to prioritize the biggest risks and steer funding to those cities and urban areas. Transforming UASI into an entitlement program for states, rather than a program that protect our cities from terrorists, is in fact the failure of imagination we were warned about by the 9-11 Commission.
Our inquiry demonstrates a number of basic facts regarding the implementation of the UASI grant program:
The number of urban areas funded under UASI, while fluctuating from year to year, has grown since the program’s inception, resulting in resources being diverted from the most at-risk cities and urban areas.
Wide latitude is given to states and urban areas to determine the projects they will fund, and program parameters defining what constitute allowable expenses are extremely broad. This has resulted in many states and urban areas using homeland security grant funds to make questionable purchases or offset costs that otherwise would have been borne by state and local governments.
While DHS recently established its first National Preparedness Goal, it has yet to develop a robust assessment of the nation’s current preparedness capabilities or defined performance metrics to assess the effectiveness of federal expenditures made to date.
DHS is now proposing a major reorganization of all of its grant programs, including UASI, into a single grant program along with a request for an additional $1.5 billion in funding. This proposal offers an opportunity to pause and reassess a set of fundamental questions that are key to improving the effectiveness and accountability of taxpayer funds used to prepare and secure the nation from the threat of terrorist attacks.
How will DHS meet its fundamental mission to provide funding to the areas at highest risk of terrorist attacks for validated needs that enhance national goals? How will DHS better ensure that effective oversight of these funds takes place at the federal, state, and local level?
Finally, how and when will DHS implement a systematic approach to define and measure the preparedness capabilities it desires, and then assess whether those capabilities are being achieved as effectively and efficiently as possible? Failure by Congress to demand answers to these questions will continue to place billions of dollars in taxpayer money at risk and will perpetuate the structural deficiencies our review of this program has identified.
One notable training-related event that was deemed an allowable expense by DHS was the HALO Counter-Terrorism Summit 2012. Held at the Paradise Point Resort & Spa on an island outside San Diego, the 5-day summit was deemed an allowable expense by DHS, permitting first responders to use grant funds for the $1,000 entrance fee.
Event organizers described the location for the training event as an island paradise: “the exotic beauty and lush grandeur of this unique island setting that creates a perfect backdrop for the HALO Counter-Terrorism Summit. This luxury resort features over 460 guestrooms, five pools, three fantastic restaurants overlooking the bay, a world-class spa and state-of-the-art fitness center. Paradise awaits…”
While the summit featured various training courses for participants, the HALO Corporation explained that a top goal was to bring together technology vendors and possible customers at first-responder agencies. According to the company’s promotional material, “The 2012 Summit is specifically designed to allow more interaction between those who develop the products and those who use them.” Over the course of the 5-day conference, numerous technology companies provided live-action demonstrations in an effort to drum up business.
“In my view it’s not how large your company is,” explained Brad Barker, president of HALO, in a promotional video, “I believe you should have the exact same access to the people who need it. At an event like this it’s a level playing field. Everybody’s going to get the same type of access because it’s five days. Imagine being on an island for five days with a limited number of people. By the end of the five days you’ll be on a first-name basis with a lot of the people who are interested in what you do.”
The marquee event over the summit, however, was its highly-promoted “zombie apocalypse” demonstration. Strategic Operations, a tactical training firm, was hired to put on a “zombie-driven show” designed to simulate a real-life terrorism event. The firm performed two shows on Halloween, which featured 40 actors dressed as zombies getting gunned down by a military tactical unit. Conference attendees were invited to watch the shows as part of their education in emergency response training.
Barker explained that, “the idea is to challenge authorities as they respond to extreme medical situations where people become crazed and violent, creating widespread fear and disorder.” According to the firm’s public relations manager, the exercise was brought about “utilizing Hollywood magic,” and setup in a “parking lot-sized movie set [with] state-of-the-art structures, pyrotechnic battlefield effects, medical special effects, vehicles and blank-firing weapons.” Barker added, however, “”This is a very real exercise, this is not some type of big costume party.”
GAO’s simulations continue to illustrate that the federal government is on an unsustainable long-term fiscal path. In both the Baseline Extended and Alternative simulations, debt held by the public grows as a share of gross domestic product (GDP) over the long term as shown in figure 1. While the timing and pace of growth varies depending on the assumptions used, neither set of assumptions achieves a sustainable path.
In the Baseline Extended simulation, which assumes current law, including the discretionary spending limits and other spending reductions contained in the Budget Control Act (BCA) of 2011 and expiration of certain tax cuts enacted in 2001 and 2003, debt as a share of GDP declines in the short term before turning up again.
In the Alternative simulation, in which these laws are assumed to not take full effect, federal debt as a share of GDP grows throughout the period. Discretionary spending limits alone do not address the fundamental imbalance between estimated revenue and spending, which is driven largely by the aging of the population and rising health care costs.
The Patient Protection and Affordable Care Act (PPACA) slows the growth of health care spending and federal debt under the Baseline Extended simulation, in which cost-containment mechanisms are assumed to be fully implemented and effective.
However, some have questioned whether these mechanisms can be sustained over the long term; this is reflected in GAO’s Alternative simulation.
Figure 1: Debt Held by the Public under Two Fiscal Policy Simulations
Significant actions to change the long-term fiscal path must be taken and the design of these actions should take into account concerns about the near-term impact on economic growth.
In the near term, for example, the Baseline Extended simulation reflects a number of fiscal policy changes contained in current law that are projected to sharply reduce spending and raise revenue from their current levels beginning in 2013.
CBO, the Federal Reserve Board Chairman, and others project that such drastic fiscal tightening—commonly referred to as the “fiscal cliff”—could disrupt economic growth.
In the Alternative simulation, historcial trends and past policy preferences are assumed to continue; revenue is lower and spending is higher than in the Baseline Extended simulation.
While CBO projects that continuation of such polices would prevent disruptions to the economy in the very near term, it would lead to higher debt over the long term.
In both GAO simulations spending for the major health and retirement programs will increase in coming decades, putting greater pressure on the rest of the federal budget. For the first few decades this spending is driven largely by the aging of the population.
The oldest members of the baby-boom generation are already eligible for Social Security retirement benefits and for Medicare, and, as shown in figure 2, the number of baby boomers turning 65 is projected to grow in coming years from an average of about 7,600 per day in 2011 to more than 11,000 per day in 2029.
Figure 2: Daily Average Number of People Turning 65 Each Year
Health care spending has been growing faster than the overall economy and is expected to continue growing as more members of the baby-boom generation become eligible for federal health programs and the cost of caring for each enrollee increases.
If PPACA is implemented as currently written and is effective, it would have a major effect on slowing the rate of growth in federal health care spending as shown in our Baseline Extended simulation.
In this simulation, spending on Medicare and Medicaid, the Children’s Health Insurance Program (CHIP), and exchange subsidies grows from 5 percent of GDP in 2010 to over 7 percent by 2030.
If, however, the cost containment measures are not sustained over the long term—a concern expressed by the Trustees, the CMS Actuary, the CBO, and others—spending on federal health care programs grows much more rapidly.
Spending on Medicare and Medicaid, CHIP, and exchange subsidies under the Alternative simulation grows to over 8 percent of GDP by 2030.
Figures 3 and 4 below show revenue and the composition of spending in the Baseline Extended and Alternative scenarios moving forward.
In the Baseline Extended simulation, not only is health care spending growth slower, but revenue as a share of the economy is higher and discretionary spending lower than at any point in the last 50 years.
Even in this simulation, revenue covers little more than spending on Social Security, Medicare, Medicaid, CHIP, exchange subsidies, and interest in 2040 (see fig. 3).
There is little room for “all other spending,” which includes not only national defense, homeland security, veteran’s health care, and investment in highways and mass transit, but also smaller entitlement programs such as farm price supports and student loans.
Figure 3: Potential Fiscal Outcomes: Revenues and Composition of Spending in the Baseline Extended Simulation
As figure 4 shows, if the federal government continues on the current path, as assumed in the Alternative simulation, and borrows from the public to finance the growing imbalance between revenue and spending, by 2040 more than half of all federal revenue will go to net interest payments.
Overall, our simulations illustrate the difficult trade-offs that policymakers will have to consider in order to put the federal government on a more sustainable path.
Figure 4: Potential Fiscal Outcomes: Revenues and Composition of Spending in the Alternative Simulation
Balancing Near-Term and Long-Term Considerations
One measure of the challenge over the long term is the “fiscal gap.” The fiscal gap represents the difference, or gap, between revenue and noninterest spending over a certain period, such as 75 years, that would need to be closed in order to achieve a specified debt level at the end of the period.
From the fiscal gap, one can calculate the size of action needed—in terms of tax increases, spending reductions, or, more likely, some combination of the two—to close the gap.
For example, to keep debt held by the public as a share of GDP in 2086 from exceeding its level at the beginning of 2012 (roughly 68 percent of GDP) in our Alternative simulation, the fiscal gap is 8.3 percent of GDP.
This means that revenue would have to increase by 46 percent or noninterest spending would have to be reduced by about 32 percent (or some combination of the two) on average over the 75-year period. Even more significant changes would be needed to reduce debt to lower levels.
Figure 5: Debt Held by the Public under Fiscal Policy Simulations with Different Assumptions for Major Entitlement Programs
The simulation results depend largely on what is assumed about growth in large entitlement programs. As in previous updates, we also show the Baseline Extended simulation using both Trustees and CBO estimates for long-term spending on Social Security and major health entitlement programs (Medicare, Medicaid, and others).
In addition, we show the Alternative simulation using different assumptions about certain health care cost-containment provisions based on CBO and CMS Actuary alternative projections. As figure 5 shows, the results are not materially different. The outlook under either set of assumptions is unsustainable.
When considering action to address the longer-term fiscal challenge, it is important to recognize the current state of the economy.
With this in mind, policy changes could be designed to phase in over time allowing for the economy to fully recover and for people to adjust to the changes. However, the longer action is delayed the greater the risk that the eventual changes will be disruptive and destabilizing.
Under our Alternative simulation, waiting 10 years would increase the fiscal gap to nearly 10 percent of GDP—meaning a revenue increase of more than 54 percent or a noninterest spending cut of about 37 percent or some combination of the two would be required to bring debt held by the public back to its level in 2012 by 2086.
Concluding Observations
Addressing the long-term fiscal challenge will likely require difficult choices affecting both revenue and spending. In addition, the need to act soon to develop a plan for addressing the long-term fiscal imbalance must be balanced with concerns about the near-term impact of policy decisions.
Action now would allow for the greatest range of options to address the fiscal imbalance and strengthen the economy for the long term. Many of the long-term drivers highlighted in past updates, including health care cost growth and the aging population, have already begun to affect the federal budget. These are challenges for which there are no quick or easy solutions.
Mises Daily: Monday, November 19, 2012 by Ludwig von Mises
… In the market economy, everyone serves his fellow citizens by serving himself. This is what the liberal authors of the 18th century had in mind when they spoke of the harmony of the rightly understood interests of all groups and of all individuals of the population.
And it was this doctrine of the harmony of interests which the socialists opposed. They spoke of an “irreconcilable conflict of interests” between various groups.
What does this mean? When Karl Marx — in the first chapter of the Communist Manifesto, that small pamphlet which inaugurated his socialist movement — claimed that there was an irreconcilable conflict between classes, he could not illustrate his thesis by any examples other than those drawn from the conditions of precapitalistic society.
In precapitalistic ages, society was divided into hereditary status groups, which in India are called “castes.” In a status society a man was not, for example, born a Frenchman; he was born as a member of the French aristocracy or of the French bourgeoisie or of the French peasantry.
In the greater part of the Middle Ages, he was simply a serf. And serfdom, in France, did not disappear completely until after the American Revolution. In other parts of Europe it disappeared even later.
But the worst form in which serfdom existed — and continued to exist even after the abolition of slavery — was in the British colonies abroad. The individual inherited his status from his parents, and he retained it throughout his life. He transferred it to his children. Every group had privileges and disadvantages.
The highest groups had only privileges, the lowest groups only disadvantages. And there was no way a man could rid himself of the legal disadvantages placed upon him by his status other than by fighting a political struggle against the other classes.
Under such conditions, you could say that there was an “irreconcilable conflict of interests between the slave owners and the slaves,” because what the slaves wanted was to be rid of their slavery, of their quality of being slaves.
This meant a loss, however, for the owners. Therefore, there is no question that there had to be this irreconcilable conflict of interests between the members of the various classes.
One must not forget that in those ages — in which the status societies were predominant in Europe, as well as in the colonies which the Europeans later founded in America — people did not consider themselves to be connected in any special way with the other classes of their own nation; they felt much more at one with the members of their own class in other countries.
A French aristocrat did not look upon lower class Frenchmen as his fellow citizens; they were the “rabble,” which he did not like. He regarded only the aristocrats of other countries — those of Italy, England, and Germany, for instance, as his equals.
The most visible effect of this state of affairs was the fact that the aristocrats all over Europe used the same language. And this language was French, a language which was not understood, outside France, by other groups of the population.
The middle classes — the bourgeoisie — had their own language, while the lower classes — the peasantry — used local dialects which very often were not understood by other groups of the population. The same was true with regard to the way people dressed.
When you travelled in 1750 from one country to another, you found that the upper classes, the aristocrats, were usually dressed in the same way all over Europe, and you found that the lower classes dressed differently.
When you met someone in the street, you could see immediately — from the way he dressed — to which class, to which status he belonged…
The Austrian School of economics is a school of economic thought which bases its study of economic phenomena on the interpretation and analysis of the purposeful actions of individuals. It derives its name from its origin in late-19th and early-20th century Vienna with the work of Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and others.
Currently, adherents of the Austrian School can come from any part of the world, but they are often referred to as “Austrian economists” or “Austrians” and their work as “Austrian economics”.
The main tenets of the Austrian School are generally considered to be:
The theory that economic events are best explained by a deductive study of human action.
The theory that the use of economic models and statistical methods to model economic behavior are a flawed, unreliable, and insufficient means of analyzing economic behavior and evaluating economic theories.
The theory that testability in economics and consistently accurate mathematical modeling of an economic market are impossible because mathematical modeling of any real market affects the decision-makers in that market and “testing” relies on real human actors who cannot be placed in a lab setting without altering their would-be actions.
The theory that the way in which money is produced has real and not only nominal economic effects.
The theory that the cost of any activity should be measured by reference to the next best alternative.
The theory that, in a free market, interest rates and profits are determined by three factors: monetary gains or losses from a change in the consumption of a good or service, additional output that can be produced by additional inputs, and the time preference of the associated individual agents.
The theory that markets clear if prices are allowed to adjust freely.
The theory that inflation properly defined relates to an increase in the supply of money (including credit) which causes prices to rise.
The theory that capital goods and labor are highly heterogeneous (diverse), that money allows different goods to be analyzed in terms of their cost effectively, that economic calculation requires a common basis for comparison for all forms of capital and labor, that this process is the signaling function of prices, and that it is also a rationing function which prevents over-use of inherently limited resources.
The theory that the capital structure of economies consists of heterogeneous goods that have multi-specific uses which must be aligned to be effectively allocated, that the economic “boom-bust cycle” is caused by an artificial and unsustainable expansion of credit by the banks, and that this expansion causes businesses to make bad investment decisions which, in turn, necessarily cause major economic dislocation.
The Austrian School differs significantly from many other schools of economic thought in that the Austrian analysis of the observed economy begins from a prior understanding of the motivations and processes of human action.
To understand purposeful economic behavior and its consequences, the Austrian School follows an approach termed methodological individualism, or, as Ludwig von Mises termed it, “praxeology.” Mises was the first Austrian economist to present a theory of praxeology as such. Subsequently, Murray Rothbard presented a different version of praxeology in his work Man, Economy, and State.
Many theories developed by “first wave” Austrian economists have been absorbed into most mainstream schools of economics. These include Carl Menger’s theories on marginal utility, Friedrich von Wieser’s theories on opportunity cost, and Eugen von Böhm-Bawerk’s theories on time preference, as well as Menger and Böhm-Bawerk’s criticisms of Marxian economics.
The former U.S. Federal Reserve Chairman, Alan Greenspan, speaking of the originators of the School, said in 2000, “the Austrian School have reached far into the future from when most of them practiced and have had a profound and, in my judgment, probably an irreversible effect on how most mainstream economists think in this country.”
Nobel Laureate James M. Buchanan has stated that he would not object to being identified as an Austrian economist. Republican U.S. congressman Ron Paul is a firm believer in Austrian School economics and has authored six books on the subject.
Paul’s former economic adviser, Peter Schiff, is an adherent of the Austrian School.Jim Rogers, investor and financial commentator, also considers himself of the Austrian School of economics.Chinese economist Zhang Weiying, who is known in China for his advocacy of free market reforms, supports some Austrian theories such as the Austrian theory of the business cycle.
Neoliberalism refers to economic liberalizations, free trade and open markets, privatization, deregulation, and enhancing the role of the private sector in modern society. Today the term is mostly used as a general condemnation of economic liberalization policies and its advocates.
The term was introduced in the late thirties by European liberal intellectuals to promote a new form of liberalism after interest in classical liberalism had declined in Europe.
In the decades that followed, neoliberal theory tended to be at variance with the more laissez-faire doctrine of classical liberalism and promoted instead a market economy under the guidance and rules of a strong state, a model which came to be known as the social market economy.
In the sixties, usage of the term “neoliberal” heavily declined. When the term was reintroduced in the following decades, the meaning had shifted. The term neoliberal is now normally associated with laissez-faire economic policies, and is used mainly by those who are critical of market reform.
The term “neoliberalism” was originally coined in 1938 by the German scholar Alexander Rüstow at the Colloque Walter Lippmann.The colloquium defined the concept of neoliberalism as “the priority of the price mechanism, the free enterprise, the system of competition and a strong and impartial state.”
To be “neoliberal” meant that – in the name of liberalism – a modern economic policy is required. Neoliberalism was not a monolithic theory. At the outset it drew on different academic approaches such as the Freiburg school, the Austrian School, the Chicago school of economics, and Lippmann´s realism.
Following the core message of Lippmann’s book The Good Society participants like Rüstow, Lippmann and Rougier agreed that the old liberalism of laissez faire had failed and that a new liberalism needed to take its place.
While for them it was a farewell to classical liberalism, which they thought to have failed, other participants like Mises and Hayek were not convinced to condemn the old liberalism of laissez faire. But all participants were united in their call for a new liberal project. Following Rüstow’s original recommendation they called this project neoliberalism.
The neoliberalism that came out of the Colloque Walter Lippmann was generally in line with Rüstow’s theories of turning away from conceptions of unrestricted liberty towards a market economy under the guidance and the rules of a strong state.
It was an attempt to formulate an anti-capitalist, anti-communist Third Way. Neoliberalism was originally established as something quite different from the free market radicalism with which it is usually associated today.
At the Colloque Walter Lippmann, the differences between ‘true neoliberals’ around Rüstow and Lippmann on the one hand and old school liberals around Mises and Hayek on the other were already quite visible. There occurred fundamental differences.
While ‘true neoliberals’ demanded state intervention to correct undesirable market structures, Mises had always insisted that the only legitimate role for the state was to abolish barriers to market entry. Similar differences of opinion also existed in other questions such as social policy and the scope for interventionism. After a few years the insurmountable differences between old liberals and the neoliberals become unbearable.
Rüstow was bitter that Mises still adhered to a version of liberalism that Rüstow thought had failed spectacularly. In a letter Rüstow wrote that Hayek and his master Mises deserved to be put in spirits and placed in a museum as one of the last surviving specimen of the extinct species of liberals which caused the current catastrophe (the Great Depression).
Ludwig von Mises became equally critical of the german neoliberals. He complained that Ordoliberalism really meant ‘ordo-interventionism’.
The Mont Pelerin Society was founded in 1947 by Friedrich Hayek to bring together the widely scattered neoliberal thinkers and political figures. “Hayek and others believed that classical liberalism had failed because of crippling conceptual flaws and that the only way to diagnose and rectify them was to withdraw into an intensive discussion group of similarly minded intellectuals.”
With central planning in the ascendancy world-wide and with few avenues to influence policymakers, the society served to bring together isolated advocates of liberalism as a “rallying point” – as Milton Friedman phrased it. Meeting annually, it would soon be a “kind of international ‘who’s who’ of the classical liberal and neo-liberal intellectuals.”
While the first conference in 1947 was almost half American, the Europeans concentration dominated by 1951. Europe would remain the “epicenter” of the community with Europeans dominating the leadership.
The first form of neoliberalism, classical neoliberalism, stems from classical liberalism and was chiefly created in inter-War Austria by economists, including Friedrich Hayek and Ludwig von Mises. They were concerned about the erosion of liberty by both socialist and fascist governments in Europe at that time and tried to restate the case for liberty which became the basis for neoliberalism.
Hayek’s 1970s book, The Constitution of Liberty sums up this argument. In the introduction he states: If old truths are to retain their hold on men’s minds, they must be restated in the language and concepts of successive generations.
Hayek’s belief in liberty stemmed from an argument about information.He believed that no individual (or group, including the government) could ever understand everything about an economy or a society in order to rationally design the best system of governance. He argued this only got worse as scientific progress increased and the scope of human knowledge grew, leaving individuals increasingly more and more ignorant in their lifetimes.
As a result, he believed it was impossible for any person or government to design the perfect systems under which people could be governed. The only solution to this, he believed, was to allow all possible systems to be tried in the real world and to allow the best systems to beat the worse systems through competition.
In a liberal society, he believed, the few who used liberty to try out new things would come up with successful adaptations of existing systems or new ways of doing things. These discoveries, once shared and become mainstream, would benefit the whole of society, even those who did not directly partake of liberty.
Due to the ignorance of the individual, Hayek argued that an individual could not understand which of the various political, economic and social rules they had followed had made them successful.
In his mind, this made the superstitions and traditions of a society in which an individual operated vitally important,since in probability they had, in some way, aided the success of the individual. This would be especially true in a successful society, where these superstitions and traditions would, in all probability be successful ones that had evolved over time to exploit new circumstances.
However, this did not excuse any superstition or tradition being followed if it had outlived it usefulness: respect of tradition and superstition for the sake of tradition and superstition were not acceptable values to him. Therefore classical neoliberalism combined a respect for the old, drawn from conservatism, with the progressive striving towards the future, of liberalism.
In emphasising evolution and competition of ideas, Hayek highlighted the divide between practical liberalism that evolved in a haphazard way in England, championed by such people as David Hume and Adam Smith, versus the more theoretical approach of the French, in such people as Descartes and Rousseau.
Hayek christened these the pragmatic and rationalist schools, the former evolving institutions with an eye towards liberty and the later creating a brave new world by sweeping all the old and therefore useless ideas away.
Hayeks’s ideas on information and the necessity of evolving evolutions placed neoliberalism firmly on the pragmatic side against both rationalist socialists (such as communists, fascism and social liberals) and rationalist capitalists (such as economic libertarians, laissez-faire capitalists) alike.
The rule of law
At the centre of neoliberalism was the rule of law. Hayek believed that liberty was maximised when coercion was minimised. Hayek did not believe that a complete lack of coercion was possible, or even desirable, for a liberal society, and he argued that a set of traditions was absolutely necessary which allowed individuals to judge whether they would or would not be coerced. This body of tradition he notes as law and the use of this tradition and the Rule of Law.
In designing a liberal system of law, Hayek believed that two things were vitally important: the protection and delineation of the personal sphereand the prevention of fraud and deception, which could be maintained only by threat of coercion from the state. In delineating a personal sphere, individuals could know under what circumstances they would or would not be coerced under, and could make plans for the use of their resources in achieving their aims.
In designing such a system, Hayek believed that it could maintain a protected sphere by protecting against abuses by the ruling power, be it a monarch (e.g. Bill of Rights 1689), the will of the majority in a democracy (e.g. the US Constitution) or the administration (e.g. the Rechtsstaat).
He believed that the most important features of such protections were equality before the law, and generality of the law. Equality meant that all should be equal before the law and therefore subject to it, even those decisions of a legislature or government administration.
Generality meant that the law should be general and abstract, focusing not on ends or means, as a command would, but on general rules which, by their lack of specificity, could not be said to grant privileges, discriminate or compel any specific individual to an end.
General laws could also be used to transmit knowledge and encourage spontaneous order in human societies (much like the use of Adam Smith’s invisible hand in economics). He also stressed the importance of individuals being responsible for their actions in order to encourage others to respect the law.
Neoliberal economics
Friedman’s chief argument about neoliberalism can be described as a consequentialist libertarian one: that the reason for adopting minimal government interference in the economy is for its beneficial consequences, and not any ideological reason. At the heart of economic neoliberalism are various theories that prove the economic neoliberal ideology.
Neoliberal economics in the 1920s took the ideas of the great liberal economists, such as Adam Smith, and updated them for the modern world. Friedrich Hayek‘s ideas on information flow, present in classical neoliberalism, were codified in economic form under the Austrian School as the economic calculation problem.
This problem of information flow implied that a decentralised system, in which information travelled freely and was freely determined at each localised point (Hayek called this catallaxy), would be much better than a central authority trying to do the same, even if it was completely efficient and was motivated to act in the public good.In this view, the free market is a perfect example of such a system in which the market determined prices act as the information signals flowing through the economy.
Actors in the economy could make decent decisions for their own businesses factoring in all the complex factors that led to market prices without having to understand or be completely aware of all of those complex factors.
In accepting the ideas of the Austrian School regarding information flow, economic neoliberals were forced to accept that free markets were artificial, and therefore would not arise spontaneously, but would have to be enforced, usually through the state and the rule of law. In this way, economic neoliberalism enshrines the role of the state and becomes distinct from libertarian thought.
However, in accepting the ideas of self-regulating markets, neoliberals drastically restrict the role of the government to managing those forms of market failure that the neoliberal economics allowed: property rights and information asymmetry.
This restricted the government to maintaining property rights by providing law and order through the police, maintaining an independent judiciary and maintaining the national defence, and basic regulation to guard against fraud. This made neoliberal economics distinct from Keynesian economics of the preceding decades.
These ideas were then developed further. Milton Friedman introduced the idea of adaptive expectations during the stagflation of the 1970s, which described why government interference (in the form of printing money) resulted in increasing inflation, as shop owners started to predict the rate of increase in the money supply, rendering the government action useless.
This developed into the idea of rational expectations, which showed that all government interference useless and disruptive because the free market would predict and undermine the government’s proposed action. At the same time, the efficient market hypothesis assumed that, because of catallaxy, the market could not be informationally wrong.
Or, to paraphrase the famous quote of Warren Buffett, “the market is there to inform you, not serve you”. Combined with rational expectations, this showed that markets would be self-regulating, and that regulation was unnecessary and disruptive.
Additionally, many theories were developed which showed that the free market would produce the socially optimum equilibrium with regard to production of goods and services, such as the fundamental theorems of welfare economics and general equilibrium theory, which helped prove further that government intervention could only result in making society worse off (see Pareto efficient).
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