• Pragerisms

    For a more comprehensive list of Pragerisms visit
    Dennis Prager Wisdom.

    • "The left is far more interested in gaining power than in creating wealth."
    • "Without wisdom, goodness is worthless."
    • "I prefer clarity to agreement."
    • "First tell the truth, then state your opinion."
    • "Being on the Left means never having to say you're sorry."
    • "If you don't fight evil, you fight gobal warming."
    • "There are things that are so dumb, you have to learn them."
  • Liberalism’s Seven Deadly Sins

    • Sexism
    • Intolerance
    • Xenophobia
    • Racism
    • Islamophobia
    • Bigotry
    • Homophobia

    A liberal need only accuse you of one of the above in order to end all discussion and excuse himself from further elucidation of his position.

  • Glenn’s Reading List for Die-Hard Pragerites

    • Bolton, John - Surrender is not an Option
    • Bruce, Tammy - The Thought Police; The New American Revolution; The Death of Right and Wrong
    • Charen, Mona - DoGooders:How Liberals Hurt Those They Claim to Help
    • Coulter, Ann - If Democrats Had Any Brains, They'd Be Republicans; Slander
    • Dalrymple, Theodore - In Praise of Prejudice; Our Culture, What's Left of It
    • Doyle, William - Inside the Oval Office
    • Elder, Larry - Stupid Black Men: How to Play the Race Card--and Lose
    • Frankl, Victor - Man's Search for Meaning
    • Flynn, Daniel - Intellectual Morons
    • Fund, John - Stealing Elections
    • Friedman, George - America's Secret War
    • Goldberg, Bernard - Bias; Arrogance
    • Goldberg, Jonah - Liberal Fascism
    • Herson, James - Tales from the Left Coast
    • Horowitz, David - Left Illusions; The Professors
    • Klein, Edward - The Truth about Hillary
    • Mnookin, Seth - Hard News: Twenty-one Brutal Months at The New York Times and How They Changed the American Media
    • Morris, Dick - Because He Could; Rewriting History
    • O'Beirne, Kate - Women Who Make the World Worse
    • Olson, Barbara - The Final Days: The Last, Desperate Abuses of Power by the Clinton White House
    • O'Neill, John - Unfit For Command
    • Piereson, James - Camelot and the Cultural Revolution: How the Assassination of John F. Kennedy Shattered American Liberalism
    • Prager, Dennis - Think A Second Time
    • Sharansky, Natan - The Case for Democracy
    • Stein, Ben - Can America Survive? The Rage of the Left, the Truth, and What to Do About It
    • Steyn, Mark - America Alone
    • Stephanopolous, George - All Too Human
    • Thomas, Clarence - My Grandfather's Son
    • Timmerman, Kenneth - Shadow Warriors
    • Williams, Juan - Enough: The Phony Leaders, Dead-End Movements, and Culture of Failure That Are Undermining Black America--and What We Can Do About It
    • Wright, Lawrence - The Looming Tower

Vote in North Carolina bans Gay Marriage

North Carolina Voters Approve Same-Sex Marriage Ban

by Julie Sobel from the National Journal:

North Carolina voters overwhelmingly passed a constitutional amendment that would ban same-sex marriage, making it the 29th state to define marriage as between a man and a woman.

The Associated Press declared Amendment 1 passed. With 63 percent of precincts reporting, the measure has 61 percent support with 39 percent opposing.

The vote came as President Obama has been facing criticism from his base for not coming out in favor of gay marriage, even as several of his Cabinet officials have expressed support. The most recent Gallup poll shows a plurality of voters support gay marriage – with the number backing it growing over the last several years. But the results in North Carolina, a major presidential battleground, could temper some of that momentum.

As National Journal’s Beth Reinhard wrote on Monday, the issue of gay marriage is politically complicated for Obama because while young voters largely support it, African-Americans do not.

Indeed, many rural, heavily African-American counties that strongly supported Obama in the 2008 contest overwhelmingly backed the gay marriage ban. In Hertford County, which is over 60 percent African-American, Obama won 70 percent of the vote in 2008 but it voted heavily for Amendment 1 (3,817 yes votes; 1,627 no votes).

In Bertie County, the most African-American county in the state (over 62 percent), Obama garnered over 65 percent of the vote. The county isn’t reporting final results for the amendment, but 2,703 are currently voting yes while just 951 voted no.

The handful of counties that opposed the amendment were urban centers, most featuring large college campuses.

While an existing statute outlawed gay marriage, North Carolina was the only Southern state without a constitutional ban. Former President Bill Clinton recorded a robo-call against the measure, and Obama spoke out against it last month. Social conservatives also mobilized, with the Rev. Billy Graham featured in a full-page newspaper advertisement backing the amendment.

“While the passage of tonight’s amendment is disappointing, it does not erase the incredible progress that gay and lesbian couples have made under the President’s leadership,” Democratic National Committee Chair Debbie Wasserman Schultz said in a statement. “From putting an end to the legal defense of the Defense of Marriage Act in the courts and endorsing legislation to repeal it, to making sure that same-sex couples have equal hospital visitation and medical decision-making rights and extending key benefits to the same-sex partners of federal employees, we have taken great strides forward.

Same-sex marriage is currently legal in six states (Massachusetts, Connecticut, Iowa, Vermont, New Hampshire, New York) and the District of Columbia.
Comment: It should be noted that the six states which permit gay marriage did not permit a popular vote to decide the matter. Modern Democrats usually prefer ukase rule over popular will.

Comment: It is not in the contemporary Liberal American tradition to consider the consequences of major changes in the American political and cultural structure. Liberals pass laws to gather and maintain power no matter what future chaos might result. One should not forget it was the Liberal demand of the in the 1950s and 1960sfor Aid for Dependent Children and other welfare ‘benefits’ that threw the black father out of the family and marriage.

It is the Democrat Party folk who have managed to destroy the public school be removing teaching knowledge and discipline from the school curricula.

In 2012 Americans will pay about $4,041,000,000,000 in taxes

Americans Pay More in Taxes than for Food, Clothing and Shelter

From the National Center for Policy Analysis:

In 2012, Americans will pay approximately $4.041 trillion in taxes, which is $152 billion, or 3.9 percent, more than they will spend on housing, food and clothing. Through looking at contemporary data and examining the trend of tax collections and expenditures on housing, food and clothing, we can compare the costs of government with the necessary costs individuals incur every year. As a greater tax burden has been levied on some individuals, more government revenues have gone into programs that spend money on these essential goods. These programs increase the share of necessary items bought by governments rather than individuals, says Kevin Duncan, an adjunct scholar at the Tax Foundation.

•Between 1929 and the early 1980s, aggregate tax collections were less than total expenditures on housing, food and clothing.
•From 1929 to 1980, tax liabilities grew from $10 billion to $751 billion, while expenditures on housing, food and clothing grew from $41.6 billion to $775.7 billion.
•In 1982, total tax collections exceeded expenditures on those items.
•The gap between tax collections and expenditures on essential goods reached a maximum in 2000, when Americans gave 19 percent more to the government than they spent on these items.
•The growth in tax collections has halted due to economic contractions, such as the collapse of the “dot-com bubble” in 2001 and the 2007 financial crisis.
Transfer payments, or government social benefits, have grown to represent a substantial portion of money spent on living expenses, encompassing housing, food, clothing, health care and transportation. This means that the government is picking up an increasing portion of the tab for these essential goods.

•For instance, in 1929 transfer payments represented only 0.5 percent of private expenditures on housing, food, clothing, health care and transportation.
•By 1965, when Medicare began, this percentage had grown to about 11 percent.
•Today it stands at close to 35 percent.
There are some restrictions inherent in comparing tax costs to expenditures on essential goods. For example, a large share of tax revenues today are spent on transfer payments, which private individuals then spend on essential goods. This leads to double counting, as the taxes that finance these programs and the increased consumption that those taxes fund are included in both tax and consumption figures, respectively. Despite these limitations, the comparison of tax costs to the basic cost of living provides a useful illustration of the growing cost of government.

Source: Kevin Duncan, “Americans Paying More in Taxes than for Food, Clothing and Shelter,” Tax Foundation, May 3, 2012.

Dennis Prager Reviews the Gay Marriage Issue

Conservatives and Gays …. by Dennis Prager


In addition to labeling conservatives and Republicans “anti-woman” (for opposing government-mandated free contraception), “anti-black” and “anti-Hispanic” (for advocating photo identification for voting), and “anti-science” (for skepticism regarding the belief that man-made carbon emissions will destroy much of the planet), Democrats now regularly label Republicans “anti-gay” (for opposing same-sex marriage).

All these charges are demagogic. But when it comes to the “anti-gay” charge, conservatives need to clarify to themselves as much as to the general public where they stand.

As an opponent of the most radical redefinition of marriage in history (more radical than outlawing polygamy), I have argued for the Defense of Marriage Act before Congress and have written and spoken on behalf of amending state constitutions to define marriage as the union of one man and one woman. I believe that the ultimate aim of the LGBT movement and the rest of the cultural left is nothing less than to end gender distinctions.

But I am not anti-gay. Proponents of same-sex marriage may conflate opposition to same-sex marriage with being anti-gay. But conservatives must not.

Those of us who fear the consequences of redefining marriage — asking children if they hope to marry a boy or a girl when they get older, banning religious adoption agencies from placing children first with a married man and woman, denying the importance of both sexes in making families, choosing boys to be high school prom queens, and girls to be high school prom kings, and much more — must make it clear that we regard homosexuals as fellow human beings created in God’s image just as heterosexuals are.

This issue has most recently arisen with regard to Richard Grenell, a foreign policy aide to Mitt Romney, who resigned shortly after his appointment. It is not yet clear why he resigned, but many assume that he did so because he is a gay man who is an outspoken proponent of same-sex marriage, and as such, not a good fit for the Romney campaign.

The Grenell case notwithstanding, no conservative should oppose a competent gay serving in a Republican administration so long as the person shares the values of the Republican Party. Even support for same-sex marriage should not necessarily rule someone out of a leadership position in the Republican Party. Former UN ambassador John Bolton supports same-sex marriage, and he is, for good reason, a hero to conservatives (though I could not back anyone for president who supported redefining marriage). Only if a person is an outspoken advocate of same-sex marriage would he or she, whether homosexual or heterosexual, not be a good choice for a high position in a Republican administration. Just as an outspoken defender of non-medically necessary abortion would not be.

Conservatives must object to values, not to individuals.

As it happens, there are far more gays who hold conservative values than many gay activists — or conservatives — realize. And we should embrace these people. Being gay does not automatically mean that one is on the Left, and conservatives should not assume that they are. Otherwise, they risk pushing the gay conservative leftward.

Conservatives have to be true to social as well as economic conservatism. But there is no reason why a gay should not be a conservative.

I am close to a gay man — and his partner — who lives in the heart of San Francisco. This man is a major fund raiser for Republican candidates. And given his homosexuality and where he lives, his Republican activism is quite courageous. He should be regarded as a major asset to the conservative cause.

It is the gay Left that argues that every gay person must think like a leftist. Conservatives should not be helping these leftist activists by objecting to gays holding positions of influence in conservative political life. And, again, I am not arguing for the Romney campaign to have retained Richard Grenell. I am arguing that Mitt Romney was right when he told Fox News last week that his campaign hires people “not based upon their ethnicity or their sexual preference or their gender but upon their capability.”

This is not only the right moral position; it is also the right political position. We have a much better chance to win young and independent voters whenever we show in word and deed that Democrats and others on the left are engaging in smears when they accuse conservatives and Republicans of being anti-woman, anti-minority, or anti-gay.

Gay men and women who believe in the American Trinity — Liberty, In God We Trust, and E Pluribus Unum — and who believe in small government, in American exceptionalism, and in the need for America to be the strongest military and economic power in the world are one of us. And should be embraced as such.

Dennis Prager’s new book, “Still the Best Hope: Why the World Needs American Values to Triumph,” was published April 24 by HarperCollins. He is a nationally syndicated radio show host and creator of PragerUniversity.Com.

Republican Leftwinger, David Frum Faults Romney, Calls Defense of Marriage an Evil of the Far Right


David Frum is a contributing editor at Newsweek and The Daily Beast and a CNN contributor. Washington (CNN) —

Introductory comment: The title of this David Frum article is “ROMNEY CAVES TO THE FAR RIGHT’.

The statement of truth, however, is that Mr. Frum has caved to the far LEFT for the sake of his schtick….his employment….his purpose for existence…..a man from a conservative past with some conservative credentials who is the conservative’s Juan Williams of the American Marxist movement.

I like Juan, however. I haven’t yet found a fondness of Mr. Frum, a laborer at CNN and Daily Beast. But America needs the David Frum vote to survive the horrors of Obama disaggrandizement of the American democratic process.

What is the Frum complaint……for I haven’t noticed that I have been dragged to the extreme RIGHT, so let us see what it is that has happened to poor allegedly maleable ‘my man’, Mitt Romney.

David Frum writes:

There is something tragic in the unfolding of Mitt Romney’s campaign for president.

Here is a supremely intelligent and competent man, superbly qualified in so many ways for the highest executive office.

Yet through six years of campaigning for the presidency, he has allowed himself to be remade and redefined by his worst enemies.

It happened again last week.

The Romney campaign had hired a new foreign policy spokesman, Richard Grenell, a former aide to then-U.N. ambassador John Bolton.

Satire novel exposes hypocrisy in D.C. Grenell is a fierce conservative who is also outspokenly gay. Grenell has taken strong public stances in favor of same-sex marriage. The Romney campaign knew all that when it hired him. Grenell had the competence to do the job, and nothing else mattered. As it shouldn’t.

The hiring came under attack. As attacks go, this wasn’t much: A couple of obnoxious blog posts and a tirade by a local radio host who runs a third-tier social conservative group. Still, the campaign opted to take cover. It reduced Grenell’s visibility, keeping him off a conference call with media where someone might ask about the social-conservative criticism, that kind of thing.

Nobody at the campaign wanted to lose Grenell. In fact, he was repeatedly urged to stay. The campaign only wanted a discreet interval for the fuss to blow over.

The trouble was that Grenell got the job in the first place because he is a fighter. When the campaign wouldn’t fight for him, he decided he wouldn’t fight for it. He resigned. The hiring of Grenell interested only political insiders. His departure detonated one of Romney’s worst news weeks.

Political professionals will remind us that there remain six months to November. By voting day, the Grenell story will have been long forgotten — even by the comparatively small number of people who ever heard of it in the first place.

Maybe. But what a campaign does is paint an image of a candidate in the public mind. The Grenell flap added a stroke to that image: The Romney campaign yields to anti-gay intolerance. That stroke lands on top of other strokes, some fair, others unfair, but all together cohering into an ever-more focused picture.

For example: Romney did not initially support legislation that would allow all employers, religious or not, to drop birth control coverage from their health plans. That was introduced by Marco Rubio. Romney has campaigned with Rubio, and he’s is much discussed as a possible Romney running mate. Although Romney has not made an issue of birth control, he will be wearing the issue in the general election.

A brand is not just something you make. It’s also something that can happen to you if you don’t speak out against it.

Romney’s Road to Victory Will be Tough……Will it be close?

Romney’s Path Is Not Necessarily Narrow

By Sean Trende at realclearpolitics:

“Chris Cillizza of the Washington Post wrote last week that Mitt Romney’s path to the presidency is awfully narrow, and that he has a ceiling of around 290 electoral votes. Thus, “[w]hile Romney’s team would absolutely take a 290-electoral-vote victory, that means he has only 20 electoral votes to play with — a paper-thin margin for error.” Dan Balz followed up with a similar piece in the same publication.

Cillizza and Balz echo Ron Brownstein, who has referred to a “blue wall” — those states that have voted for Democrats in five straight elections. Taken together, they add up to 242 electoral votes, which would suggest a ceiling for Mitt Romney of 296 electoral votes.

While the facts recited here are correct, the conclusions are questionable. As Harry Enten demonstrated a few weeks ago, it is dangerous to rely on “rules” from previous elections, especially when there are so few observations; the conclusions being drawn are based upon five elections.

There are multiple problems here. We might start by asking: Why limit ourselves to the past five elections? It’s true that Republicans haven’t won, say, Pennsylvania since 1988, but I don’t think it’s any more salient than the fact that Republicans have won Pennsylvania in one of the six previous elections, or that Obama managed to eke out a win in Indiana during the Democrats’ perfect storm of 2008.

Recall that political scientists published peer-reviewed articles in the late ‘80s and early 90s regarding the Republicans’ “lock” on the Electoral College based upon the Republicans’ electoral dominance in nine of ten elections from 1952 through 1988. Of course, they saw the pattern broken in the following election. Awarding the Democrats a “near-lock” on the Electoral College today based upon half as many observations is an even riskier venture.

What we’ve seen over the past five elections is merely a side effect of the fact that Republicans haven’t had a particularly good presidential playing field since 1988. In 1992, they were the incumbent party running amid a slow recovery in an electorate weary of 12 years of Republican rule. In 1996 they were running against a president enjoying a solid economy recovery, amid the spectacular self-immolation of the 104th Congress.

Four years later the economy was the strongest it had been in years; the Republicans were able to manage a narrow victory only because of the weakness of the Democratic nominee and the scandals plaguing the Democratic incumbent.

In 2004, the election occurred at a unique confluence where the economic recovery had been strong enough to buoy the president, but the Iraq War hadn’t yet become unpopular enough to bring him down. So another narrow victory was possible; had the election been six months earlier or six months later, George W. Bush would probably have lost.

And, of course, in 2008 John McCain sought the presidency amid a massive economic collapse, two unpopular wars, and against a popular Democratic nominee.

In which of these years would we expect the Republicans to win states that leaned Democrat by more than a point or two? The answer is almost certainly “none.” In other words, the “big blue wall” is merely a construct of how the coin flips have landed the past five cycles, not an intrinsic feature of our politics.

So what about this year? It really remains to be seen. The signs so far are that this year won’t be like 1996 or 2008. It also doesn’t seem likely to be 1980, absent a spectacular collapse in Europe.

The most likely scenario is somewhere between 2004 and 1992 — but in reverse, with a three-to-four point Democratic win and a similarly sized Republican win representing the poles (again, under roughly current conditions). But this is an important distinction.

To analyze the dearth of Republican-leaning swing states we can use Neil Stevens’ helpful “Swingometer.” This tool allows you to plug in a possible swing in the popular vote outcome from the 2008 election to the 2012 election. The program then tells you what the Electoral College result would be if all states move by a similar amount.

In other words, Obama won by 7.2 points nationally in 2008. Let’s say you think that he’ll win by five points in 2012. That’s a swing of 2.2 points toward Republicans. If that swing is uniform — i.e., if every state moved by that much (which isn’t a horrible assumption; the PVIs of the vast majority of the states usually don’t move much from cycle-to-cycle) — then Obama would win by a 332-206 electoral vote margin. Indiana, North Carolina and Nebraska’s 1st District would flip to the Republicans.

But let’s also assume that states where a candidate is less than five points down can still be considered part of a viable path to victory, regardless of what our “uniform swing” baseline suggests. If a race in a state is less than five points, then presumably the candidate’s campaign can invest resources wisely there, or can come up with a unique appeal to win it over. John Kerry almost pulled this type of strategy off with Ohio in 2004, for example; this is how Obama brought Indiana in the the Democratic fold in 2008.

So under our above scenario, the close states would be Montana, Missouri, North Carolina, Indiana, Florida, Ohio, and Virginia. The big blue wall would look pretty solid, and even running the table in the close states would only get Romney to 266 electoral votes. Under this scenario, his path to victory is basically nonexistant.

Now, at the time the aforementioned articles were written, Obama was ahead by a little more than three points nationally. This would represent a 4-point swing toward Republicans, and our baseline would give the president a 303-235 win. Florida would flip into the GOP column. Montana would move out of the “close” category, and Colorado would move in. Romney would still have to thread an extremely narrow needle to get to 269 electoral votes under this scenario, but it would be possible. He would have to win all of the “close” states – a tremendous task.

But what about today? Recent polls have shown the race closing to a one-point Obama lead. Now Ohio joins the Republican coalition, and Romney is up to 253 electoral votes. North Carolina and Indiana are no longer close. And, critically, a number of states in the “big blue wall” are placed on the playing field as the margins in Pennsylvania and Minnesota, along with New Hampshire and Iowa, join the “less than five points” category. In other words, Romney now has multiple paths to victory (as does Obama).

I suspect this is what we’ll see reflected in the state RCP Averages as more state polls begin to come in (assuming the national polls remain close). And remember, most state polls are presently sampling registered voters, not likely voters. Last cycle, moving from a registered-voters screen to a likely-voters screen resulted in a six-point differencein the Republicans’ favor. While the difference will probably be more in the three-to-four-point territory this time, that is nevertheless enough to move a number of the current “lean Democrat” states into the “tossup” category.

What about if things break for Romney, and he is winning by four points as we approach Election Day? In that event, states like Pennsylvania and New Hampshire would fall into the GOP column, while Nevada, Wisconsin, New Mexico, and New Jersey are on his campaign’s radar screen. Colorado and Virginia are only on the outskirts of competitiveness for Team Obama. Under this scenario, it is Obama who has only one or two paths to victory, while Romney enjoys an embarrassment of riches.

In short, if this is a year like 2000 or 2004 — a mediocre playing field for Republicans — then yes, Romney has few paths to victory (although Obama’s own paths to victory will be narrowed from 2008). If, however, this turns out to be a good year for Republicans, the paths will multiply. It will be a long time before we can more or less rule out anything between a good (but not great) year for Republicans or a good (but not great) year for Democrats.”

Is the Dollar in BIG Trouble…….or just Trouble? Read Barry Eichengren at the American Interest

The Once and Future Dollar

Barry Eichengreen at the American Interest:

The week between Christmas and the New Year is normally a quiet time for economic news. On December 25, 2011, however, headlines were ablaze with the news: China and Japan had reached an agreement to use their own currencies in trade and financial transactions. Their governments would establish a market for direct exchange of yuan and yen, avoiding the convoluted process in which a bank or firm in one country must first sell its national currency for dollars and then use them to buy the currency of the other. As part of the same agreement, Japan’s central bank agreed to hold more of its foreign currency reserves, most of which are in dollars, in yuan instead.

This historic accord was widely seen as a rebuke to the dominance of the dollar in international transactions. The dollar is involved in 85 percent of global foreign exchange trades. Fully 80 percent of all over-the-counter foreign exchange transactions involving the yuan and the yen are trades of those currencies for dollars. While neither China nor Japan divulges the share of its foreign exchange reserves held in dollars, educated guesses put that figure at more than 60 percent in both cases—even higher than the share of dollars in central bank reserves worldwide.

It is far from clear why the world’s second and third largest economies, both in Asia, should continue to utilize the dollar so heavily. The situation is probably best understood as a holdover from the past, when the two countries did little business with one another but traded extensively with the United States. Not so long ago, the United States was the world’s leading exporter and dominant foreign investor. The United States was the only country of economic consequence whose financial markets were fully open to investors, both private and official, from around the world. New York was the leading center for international financial transactions of all kinds. All this made it logical that firms, banks and governments should become habituated to a world in which the vast majority of international transactions were in dollars. And such habits, once formed, die hard.

This habit, however, in the view of the Chinese and Japanese governments, has outlived its usefulness. Holding such a large share of their foreign reserves, and private investments on top of that, in U.S. treasury bonds puts both countries at the mercy of the United States, which could erode the value of their assets by pushing down the dollar. Because so many transactions within Asia use the greenback, banks and firms depend on their ability to get their hands on dollars when they need them. Given America’s less than admirable record of financial stability, this is not always something that can be taken for granted. In several recent credit crunches, when the private availability of dollars dried up, the Federal Reserve made emergency dollar credits available to the Bank of Japan and Bank of Korea. These arrangements, known as swap agreements, allowed the two Asian central banks in turn to make dollars available to their firms and markets. But Asian governments are aware that the Fed is a political animal and that some members of the U.S. Congress are not exactly fans of dollar swaps. They fear that a U.S. central bank that has been a reliable provider of emergency dollar liquidity in the past may not be an equally reliable provider in the future—hence the desire of Asian countries to shed their dollar dependence.

So should the Sino-Japanese accord be seen as a lump of coal in America’s Christmas stocking? Should we worry that our living standards, economic policy freedom and geopolitical leverage are being eroded by the dollar’s loss of dominance? Or are the economic and political benefits of the dollar’s singular status—and, equally, the ability of other countries to diminish it—prone to exaggeration?

Still the One

A first thing to say is that the dollar, like the United States, isn’t going anywhere. The United States still accounts for nearly a quarter of global GDP when the output of other countries is valued at market exchange rates (which is the appropriate metric when one is concerned with international transactions). By this measure, the United States is still nearly three times the economic size of both China and Japan. Its financial markets are deep and liquid. The market in U.S. Treasury bonds—the principal instrument that foreign central banks hold as reserves—is the single largest financial market in the world. The fact that there exists a huge volume of currency transactions involving dollars allows investors to buy them in substantial quantities without driving up their price and to sell them without driving that price down. In the competition with other currencies, in other words, the dollar enjoys the advantages of incumbency.

To be sure, the yuan, the yen and other alternatives may acquire larger global roles over time. In particular, a situation in which the yuan is involved in less than 1 percent of all foreign exchange transactions, and where central banks hold it not at all as foreign exchange reserves (aside from token amounts held by the central banks of Malaysia and Nigeria) hardly seems destined to last. The explanation for this peculiar state of affairs is that China maintains tight restrictions preventing foreign investors from getting their hands on the yuan and, more generally, from moving money in and out of the country. As China now loosens those restrictions, more of its cross-border business will be conducted in yuan. As it builds markets in which its currency can be exchanged directly for other non-dollar currencies, like the market it intends to build with Japan, that trend will accelerate. No doubt some of the yuan’s gains will come at the expense of the dollar.

But China has a long way to go before the yuan becomes an attractive alternative to the dollar for banks and firms trading and investing anywhere other than in China itself. Chinese regulations, as noted, make it hard to acquire the currency. Firms can obtain it by exporting to China and accepting payment from their customers in that form. Many of the companies in question then deposit those payments in accounts in Hong Kong, where they can be borrowed by other investors. At latest report, about $100 billion worth of yuan deposits, a modest pool, has accumulated there. But for the yuan to play a more significant international role, it would be necessary for the Chinese authorities to permit foreign investors to purchase their securities on China’s own market, much as foreign investors are free to purchase Treasury bonds in the United States.

That, however, would require wholesale changes in Chinese economic policy and, indeed, in the country’s very successful development model. The system of capital controls limiting foreign financial investment would have to be dismantled. Larger capital inflows and outflows would make it harder for Chinese policymakers to keep the exchange rate at artificially competitive levels; any attempt to do so would be met with capital inflows that would push the rate up or else cause runaway inflation. China would thus have to abandon its tried-and-true development model based on export-led growth fueled by a hyper-competitive exchange rate. Chinese leaders now acknowledge that the country will soon outgrow the current development model. They foresee a time when China will depend less on exports and more on domestic consumption, and when it will have abandoned its dollar peg in favor of a more flexible exchange rate. But no one thinks that this process will be easy or that it will be completed overnight.

Simply declaring that the market is open, in any case, may not be enough to make the customers come. The liquidity of Chinese financial markets is limited: Most government and corporate bonds are held to maturity by Chinese banks and credit cooperatives. As a result, the volume of trading is a tiny fraction, barely 1 percent, of that in the United States. China’s banks are run by civil servants; their top managers are not selected on the basis of a global search. Not enough is known about their exposures, for example, to the property market.

Then there is the minor matter of rule of law. The Chinese authorities may hesitate to tamper with the deposits of foreigners precisely for fear of killing the golden goose. But they have not hesitated to look the other way in the face of abuses of international property rights protections for fear of killing off foreign direct investment. And it is far from clear what they would do in the event of a serious economic or diplomatic dispute with another country. Let’s say the United States slapped a tariff on imports from China: How might China alter its treatment of the deposits of American companies in return?

Japan may be more advanced than China both economically and financially, but it too faces significant obstacles if it seeks to unseat the dollar. The yen accounts for less than 4 percent of the foreign exchange reserves of central banks and governments, and its share has been trending downward for twenty years. That Japan was mired in an economic slump and had an unresolved banking crisis for much of that period does not help. Low birth rates and nonexistent immigration mean that the Japanese labor force, defined as those aged 23 to 69, is projected to decline significantly in coming decades. These dismal demographic prospects suggest that the country and its currency will play even smaller roles going forward.

To be sure, there are economic powers and internationally traded currencies beyond East Asia. The fact that the most widely used of these, the euro, has serious problems will not come as news to readers. Doubts about the credit-worthiness of European governments and about the stability of the continent’s banks leave foreign authorities understandably reluctant to boost their holdings of euro-denominated bonds and bank deposits. Indeed, some Asian central banks, concerned about the possibility of a eurozone breakup, are reported to have actively drawn them down.

Other European issuers of internationally recognized currencies like the United Kingdom and Switzerland are simply too small to make a dent in the dollar’s market share. In Latin America, at least one country, Brazil, possesses the requisite size. But much as Brazil has long been regarded as “the country of the future”, its currency, the real, remains a currency of the future, and its economy and financial markets are volatile by international standards. To insulate Brazil’s markets from large inflows and outflows of foreign funds, the authorities levy a heavy tax on foreign purchases of domestic securities. In South Asia, India is an obvious candidate for one day possessing a global currency, but it has even further to go than Brazil in terms of building the kind of deep and liquid financial markets that make a currency attractive to foreign users.

The dollar thus has the dubious distinction of being the least unattractive contestant at the beauty pageant. It will not dominate international finance forever, for the same reasons that the United States will not dominate the world economy indefinitely. Emerging markets starting out behind us have scope for growing faster—for narrowing the per capita income gap as they figure out their problems. It will take time for them to build deeper and more liquid financial markets and allow foreign investors to access them more readily. Any diminution of the dollar’s international role is still a ways off—even if there is no question that this change is coming.

Should we be worried that our children or grandchildren will be significantly worse off as a result of the dollar’s diminished international role?

Consider what the United States stands to lose: The fact that so much international business is conducted in dollars is a considerable convenience for U.S. banks and firms. The fact that they can engage in transactions with foreign customers using their local currency allows them to avoid the cost of changing money each time they sell merchandise or invest across borders. By contrast, exporters and investors in other countries who are compensated in dollars must pay to convert their receipts back into local currency. This additional cost is a competitive disadvantage for them.

Firms in other countries also bear the risk that the exchange rate will move against them while the transaction is underway. While they buy materials and hire workers to produce their goods using local currency, they set their export prices and receive payment in dollars. If the dollar unexpectedly depreciates, what they receive may not cover their costs. They can insure against this risk by purchasing a forward contract, but this hedge constitutes yet another cost. This, too, is something that a typical American firm is able to avoid.

Similarly, a U.S. bank that takes deposits in dollars and also extends loans to foreign customers in that currency does not have to worry about exchange rate risk. In contrast, a foreign bank that funds itself by borrowing dollars on the interbank market but denominates its loans in the local currency has what is known as a currency mismatch on its balance sheet. It must either bear the risk of insolvency if the dollar unexpectedly appreciates or insure itself by buying a hedge.

Yet these advantages of the dollar’s international status are fairly minor. Credit card holders may see a 2 percent charge each time they use their card in a foreign country, but banks and firms undertaking large foreign currency transactions can do so at a small fraction of that cost. Those costs have not prevented firms in a variety of countries whose currencies are not used internationally from becoming successful exporters. Other determinants of export competitiveness loom larger, in other words. Similarly, there are more important determinants of the competitiveness of a bank than whether or not the currency of the country in which it is chartered is used internationally. The fact that Britain is outside the eurozone has not prevented London from retaining its mantle as Europe’s leading financial center.

More important is the impact of the dollar’s international status on the U.S. Treasury’s cost of borrowing. To the extent that foreign central banks and governments use U.S. Treasury bonds as a store of wealth, reflecting their stability, liquidity and wide acceptability, the demand for them is stronger. Treasury is therefore able to place its bonds with investors at lower interest rates. This effect will be most pronounced when other countries are growing strongly—when their economies, exports and international financial transactions are all expanding and their central banks therefore seek to accumulate additional reserves as insurance against shocks to that growing volume of transactions. Thus, toward the middle of the last decade, when the world economy was growing as rapidly as any time since the early 1970s, yields on ten-year Treasury bonds were depressed by as much as a full percentage point by foreign purchases, according to some estimates. This represented a considerable savings to the U.S. government.

And to the extent that yields on government and private securities are linked, lower Treasury yields also mean lower corporate borrowing costs and lower mortgage interest rates. Since a stronger demand for dollar-denominated securities internationally also means a stronger dollar exchange rate, there are, in addition, benefits for American consumers. A stronger exchange rate means a lower dollar price for that favorite bottle of French Bordeaux, those Chilean blueberries and that Korean flat-screen television.

Indeed, it is not only for foreigners that the dollar, by virtue of its special status, serves as a form of insurance. The fact that U.S. financial markets are so liquid, and that dollars are widely accepted, gives them a kind of special safe-haven status. Whenever there is a shock to the global economy, there tends to be a rush into dollars by international investors seeking safety. Ironically, this rush into dollars is evident even when the United States itself is the source of the disturbance. Witness how the dollar strengthened when the subprime mortgage crisis erupted in the autumn of 2007 and again following the chaotic debate over whether to raise the debt ceiling in summer 2011. In a sense, the dollar’s special status affords the United States protection against the economic consequences of even its own misbehavior.

Finally, the dollar’s role as the currency on which so much international financial business is based gives the U.S. government a little bit of additional diplomatic leverage. In 2008, following the failure of Lehman Brothers, foreign central banks desperate for dollar liquidity turned to the Fed for loans, as noted above. In response, the U.S. central bank negotiated four $30 billion currency swaps with Mexico, Brazil, Singapore and South Korea. The Korean swap in particular is credited with quieting that country’s financial crisis. Seoul may be a staunch U.S. ally, but it is also keenly aware of its economic and political dependence on China. In South Korea and beyond, America’s unique ability to provide dollars in unlimited quantities, but also to withhold them, provides U.S. foreign policymakers with another pressure point to push.

On the other hand, the fact that foreign central banks and governments hold so many dollars also gives them a pressure point in conflicts with the United States. By U.S. Treasury estimates, China holds some $1.1 trillion in U.S. government bonds. Total official foreign holdings exceed $3.2 trillion, nearly a third of the $10 trillion of U.S. Treasury debt held by the public. It is worth noting that these official figures are almost certainly underestimates. In addition to purchases in the United States, which are tracked by the U.S. Treasury, governments and central banks can purchase U.S. Treasury bonds through intermediaries in foreign centers like London, where they are harder to detect. Foreign central banks also hold the securities of government-sponsored agencies like Freddie Mac and Fannie Mae, although they have trimmed those holdings since the subprime crisis.

If by purchasing U.S. Treasury bonds foreign central banks can lower U.S. interest rates by as much as a full percentage point, then they could, by curtailing those purchases, presumably raise U.S. rates by a corresponding amount. The U.S. housing market and construction sector would feel the pain. This would be a not-so-subtle way for China to make known its displeasure with U.S. policy toward North Korea or Iran, or with a U.S. Treasury decision to label China a currency manipulator. The benefits that America derives from Chinese purchases of U.S. debt are a factor in the State Department’s reluctance to push Beijing harder on human rights issues and the Treasury Department’s reluctance to push it harder on the exchange rate issue.

In principle, China could go further and sell its previous purchases. Given the magnitude of its holdings, this would cause bond prices to crater and U.S. interest rates to spike. Smaller bond market shocks than that have caused financial mayhem in the United States. Consider the 1.5 percent rise in thirty-year Treasury yields that occurred in 1994 when Japanese investors faced with a financial crisis at home sold off their U.S. holdings. The result was serious losses and fears of insolvency of major financial companies and hedge funds. If the Chinese wished to wreak havoc in U.S. financial markets, this would be the way.

The deterrent to China’s doing so is that it might also be wreaking havoc in its own markets. When institutional investors in Japan sold off some of their U.S. treasuries in 1994, driving down the price, they suffered losses on their remaining holdings. This heightened concern about the solvency of not just U.S. financial firms but Japanese financial institutions as well. China would face an analogous problem.

Beijing would be in a stronger position, admittedly, to the extent that most of its U.S. Treasuries are held by its central bank and government. Unlike the managers of a highly leveraged Japanese bank, Chinese public officials can simply grit their teeth and take losses on their residual holdings of U.S. Treasuries, if such is the price of exerting leverage over the United States without jeopardizing their own financial stability. But the Chinese government is already under fire from its public for having taken losses on its investments in U.S. Treasury bonds as a result of the dollar’s depreciation against the yuan. That public would not respond happily to more losses.

In addition, extensive sales would cause the dollar exchange rate to plunge. Chinese exporters would feel the effects in the pocket book. Transactions that were seen as the overt use of financial means to exert political leverage over the United States would undoubtedly provoke U.S. retaliation. Congress would be quick to slap a tariff on Chinese exports, hitting China right where it hurts. Lawrence Summers, the former U.S. Treasury Secretary, has colorfully referred to the bind in which this places the two countries as a situation of “mutually assured economic destruction.” This is not to deny that it is better to be a foreign creditor than a foreign debtor when international conflicts arise. Nor is it to say that the Chinese would never, under any circumstances, use their financial weapon. But, in order for them to do so, the stakes would have to be very high.

A sharp plunge in the dollar that caught institutional investors wrong footed would be devastating to all concerned. But can’t it be argued that a very gradual curtailment of purchases of dollars by China and other countries, which resulted in a gradually weakening U.S. exchange rate, would be just the tonic the U.S. economy needs? With the eventual emergence of rivals to the dollar in the international sphere, foreign central banks and other investors, seeking additional safe assets, will be able to buy more of those other currencies and correspondingly fewer dollars. Given that the Obama Administration seeks to double U.S. exports in the next five years, a gentle decline in the dollar could be just what the doctor ordered. John Bryson, the newly confirmed head of the Commerce Department, the agency most directly concerned with growing U.S. exports, emphasized once again the need for yuan appreciation (read: “dollar depreciation”) when he met with Chinese Vice Premier Wang Qishan in Chengdu this past November.

Purchases of dollar securities have in fact been the main way that China has kept the yuan from rising more rapidly against the dollar. For China, it can be argued, it is mainly the desire to keep its exchange rate down and its exports as competitive as possible—not the need for more insurance against shocks—that has led to the accumulation of such an immense stockpile of dollar reserves.

But China exports more to the European Union and to the rest of the world than to the United States. The question, then, is why it attempts to keep the yuan down against the dollar rather than keeping it down against a basket of currencies that includes not just the dollar but also the euro and perhaps others. Part of the answer, again, is habit. The country’s exporters have grown accustomed to a stable dollar exchange rate and to pricing their merchandise in dollars. Their policymakers want to keep them comfortable. But another part of the answer is that the alternative, keeping the yuan stable against the euro, requires taking risky positions in European government bonds. Keeping it stable against still other currencies would require intervening in even smaller, less liquid markets. Until other currencies acquire the stability, liquidity and international status of the dollar, it will remain the exchange rate anchor and intervention currency of choice for central banks and governments around the world. And from the point of view of U.S. exporters, that status quo is a very mixed blessing.

Beyond that, the dollar’s status as the only true global currency may not have entirely favorable implications for financial stability in the United States. U.S. households have a well-developed appetite for debt, and government policies that drive down U.S. interest rates effectively subsidize their borrowing. In boom times, when Americans have been known to indulge in a borrowing binge, anything that makes it cheap to borrow reinforces this reckless predisposition. The housing bubble that burst in 2006 had multiple causes, as bubbles and crises always do. But along with lax regulation, the incentive problems of mortgage securitizers and rating agencies, and loose monetary policies, the appetite of foreign governments for dollar assets undoubtedly played a role. In periods of frenzied excess in financial markets, speculative investments are financed with borrowed money. Normally, however, incessant demands for borrowed funds drive up interest rates, putting a damper on the speculative boom. But in the United States—in 2003–05 for example—the ready availability of funding from foreign central banks neutralized this stabilizing tendency. With American investors anxious to hang themselves, foreign central banks gave them more rope.

In a world where there are also other reserve currencies and other sources of international liquidity, foreign central banks would have alternatives. If they saw the United States again blowing a housing bubble or otherwise engaging in irresponsible financial behavior, they could cut their accumulation of dollars in favor of other currencies. Reckless U.S. investors would be confronted by higher interest rates, forcing them to curtail their excesses and mitigating risks to financial stability.

The debate over the dollar’s reserve-currency status is confused and confusing. Different U.S. government officials and agencies stake out different positions. Even a single government agency like the Treasury Department simultaneously reiterates its intention to defend and preserve the dollar’s position as the leading international currency and, at the same time, welcomes the transition to a safer and more balanced monetary and financial world. This reflects the reality that the dollar’s singular status is both a benefit and a burden to the United States. When, someday, that status is less singular, the dollar will have to share the international stage with other currencies, and both the burden and benefit will be tempered. But not any time soon.


Ten Reasons Wall Street Should be VERY Worried about the U. S. Debt

Bruce Upbin, Forbes Staff

from FORBES:

“As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible…avoid accumulation of debt, not only by shunning occasions of expense, but by vigorous exertions in time of peace to discharge the debts which unavoidable wars have occasioned, not ungenerously throwing upon posterity
ability to negatively affect equity markets, business activity and confidence. This note details 10 reasons why we believe financial markets will take a close look at what Congress does in the year ahead.

1. Assuming that sequestration takes place as planned, the Budget Control Act reduces the trajectory of the debt from the CBO’s explosive Alternative Case, but does not yet set federal debt on a sustainable path. Even after incorporating all phases of the BCA and assuming expiration of various business and household tax relief provisions, future debt ratios still rise into the mid-80s as a percentage of US GDP. The CBO Baseline shows a decline in federal debt since it assumes the following three policy options: a sunset of all Bush tax cuts, an end to indexation of AMT to inflation, and reductions to Medicare doctor reimbursements which Congress has agreed to but never enacted. These three cuts and associated interest savings would amount to roughly $6 trillion in deficit reduction over a 10 year period. However, it remains unclear what political support there would be to do so.

2. Financial markets are focused on this issue since large deficits and debt levels can affect growth. There are plenty of debates in the economic community these days (e.g., why haven’t monetary or fiscal stimulus multipliers behaved the way their supporters believed they would). One possible explanation is that fiscal stimulus loses its effectiveness when debt ratios rise too high. In the chart below, we summarize Ken Rogoff’s findings that when debt ratios in the US and in other advanced economies have exceeded 90%, economic growth suffered notably. With the US federal debt ceiling now over 100% of GDP (on a gross debt basis) and projections of net debt rising above 80%, financial markets have reason to be concerned.

Supporting Rogoff’s findings is a paper prepared by BIS economists for the Fed’s 2011 Jackson Hole symposium. In a study of sovereign, corporate and household debt over the last 3 decades, the authors find that at around 85% of GDP, government debt exerts a significant negative drag on growth. Their conclusion:

“the immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer required to address extraordinary events, governments should keep debt well below the estimated thresholds.”

3. Hoping for growth might not be the best strategy. The post-Budget Control Act debt ratio of 85% by 2022 includes the CBO growth assumptions shown in the chart below. Growth is assumed to spike to 5% in 2015, and average 2.7% over the decade. Some argue that faster growth may bail out the US from its budget problem, reducing the need for deficit reduction measures. It is true that the US has experienced growth surges before, and it is always possible another one will occur. In the 1950’s, real GDP growth averaged 4.3% for the entire decade [see table in Appendix], which resulted in debt ratios declining from 80% to 46%. However, the unique economic conditions and productivity gains of the 1950’s (e.g., interstate highway, rebuilding of Europe and Japan) may not be repeated. While we are hopeful that the US economy recovers more quickly, if it doesn’t, debt ratios might not decline below the mid 80’s, risking another round of rating agency downgrades.

Other areas of potential budget slippage: projections of military spending declines are not the same as structural deficit reduction. One item in the President’s budget proposal was an assumed $800 billion in savings from troop withdrawals out of Iraq and Afghanistan (so-called “OCO” spending). While progress has been made on this front, uncontrollable geopolitical events could require OCO spending to rise again. In addition, as shown above, the Budget Control Act already projects that non-OCO military spending as a % of GDP will fall to its lowest level since 1940, barely above the levels now spent by Japan and Germany after decades of demilitarization. As a result, financial markets may not ascribe a high likelihood to deficit reduction achieved through lower estimates of future military spending.

4. It’s not just rating agencies that are unnerved by polarization of political parties. Markets are aware of the polarization in Congress, a trend that can be understood by empirical analysis of Congressional voting patterns. As shown below, the polarization in the House and the Senate is as high as it has ever been, even higher than after Reconstruction, one of the most acrimonious periods in the country’s history. A closer look at the Senate in particular (below, right) shows that the number of party non-conformists has plummeted. Without a political middle, there is a greater risk that the ideological divide between the parties cannot be bridged, leading to intermittent government shutdowns (or the threat of them2) and market disruptions.

5. Entitlements: where we are now. Market participants are increasingly focused on entitlements relative to discretionary spending. First, some history. When Medicare was introduced in 1960’s, it was described as “brazen socialism” in the Senate. When Truman proposed a national healthcare program in the 1940’s, the plan was called a Communist plot by a House subcommittee. And when President Roosevelt introduced Social Security in the 1930’s, he was branded as a Communist sympathizer by Republican Senators from Ohio, Pennsylvania and Minnesota, publisher William Randolph Hearst and Alf Landon (Roosevelt’s GOP opponent in the 1936 Presidential election). So in 1969, when the US Census found that one quarter of Americans over the age of 65 lived in poverty, politicians showed courage in creating a larger social safety net.

However, it may take even greater courage to examine and adjust what was created. In the late 1960’s, the government estimated that Medicare expenses would grow by 7 times by 1990 (unadjusted for inflation); they grew by 61 times instead. As shown in the table, healthcare spending has overtaken education spending (a); entitlements have grown sharply compared to growth in population, household income and overall government spending (b); price-sensitive medical spending (paid out-of-pocket) has collapsed (c); and more “productive” forms of government spending have fallen to an all-time low (d). David Walker, the former Comptroller of the US, refers to this as the “crowding out” of productive discretionary programs.

6. Entitlements: where we go from here. Markets generally look at financial statements which are governed by GAAP accounting, which requires accrual of future commitments. Countries and states are not bound by accrual accounting, leaving markets to wonder (and sometimes panic) when they find out what hasn’t been accrued. The existing federal debt, which is already at elevated levels, does not include the present value of unfunded future entitlement payments. Government agencies have estimated this latter number at $36-63 trillion, which is 3-6 times the existing stock of federal debt held by the public. How much would tax rates have to rise to support entitlements growing at 5%-7% per year, if nominal GDP grew at 4%-5%? First, the 2001 tax cuts would have to expire on all brackets, and then tax rates would have to be raised by the same amount on everyone. At that point, federal debt to GDP would still be well above 2007 levels, but at least it would create some borrowing capacity to fund entitlement payments. The question is what such a policy would do to growth and employment.

7. How long will China keep buying? US Treasury markets have benefitted substantially from the appetite of Chinese and other central banks to accumulate Treasury bonds. As shown below, China’s purchases of $1.5 trillion in Treasuries and Agencies is unprecedented, even when compared to other industrializing countries with managed exchange rates. While China has prospered by doing this (keeping its exchange rate cheap and exporting more), it is a policy that carries substantial risk, primarily in the form of higher Chinese inflation. As a result, it would be risky to expect this pace of reserve accumulation to last forever. Eventually, the US Treasury will once again have to rely on private markets to finance its deficits and stock of debt. Japan has been able to sustain high federal debt and low interest rates, but it has a stock of domestic buyers prepared to hold them: 93% of all Japanese government bonds are held by Japanese locals.

8. Risks to the status of the dollar as the world’s reserve currency. The primary reason that China accumulates Treasury bonds is that its central bank is looking for large, liquid, secure places to put trillions of their own currency. The most sensible place to find such an investment: the world’s reserve currency. The percentage of global reserves held in dollars has not changed much recently (around 65%), nor has the percentage of global FX transactions denominated in dollars (85%). However, financial markets are well aware of the catalysts that led to the end of reserve currency status over the last few centuries. In general, they are: an over-extended fiscal budget, too much money-printing, declines in productivity, military adventurism and the inability to adjust to changing times, circumstances and adversaries. Financial markets understandably look at the actions of the Congress and the President on issues like these. Congress’ actions will be an important marker on the timeline of the United States and its ability to sustain its economic primacy of the last 100 years. For the record, as shown in the chart above, that’s about as long as most reserve currencies last.

10. The risk of premature fiscal tightening does not preclude Congressional work on the long term deficit issue.At a recent event we held with Pete Peterson regarding his foundation’s mission on budget dynamics, he reiterated his view that the reported choice between “jobs and deficit reduction” is a false one. There has been a lot of debate around what to do regarding the fiscal cliff facing the US next year (see first chart below). Current law would impose one of the largest fiscal drags in decades. Economists Larry Summers and Brad DeLong have argued against too much fiscal consolidation right now, asserting that (a) additional government spending can ease the long-term budget constraint in conditions similar to today’s, and (b) tightening policy now would risk permanent loss of human capital, lower labor productivity growth and lower trend growth. Let’s assume they are right, and that now is not the time for current law to be imposed in full. That doesn’t mean that progress cannot be made on the longer term entitlement issues like Social Security and Medicare. The risk of inaction should be considered as well; in the second chart, the Government Accountability Office estimates rising net interest costs over the next few decades under different budget assumptions. While we consider the CBO’s Alternative Case too pessimistic, the risk is that it falls somewhere in between, consuming a greater and greater share of government tax revenue. We have added a line showing the current share of education spending for context.

9. What economic model does the United States want to use? This chart below reflects the implicit fiscal dilemma of the last decade: the US mixes a European style welfare state with a libertarian tax regime. The result is that even after an economic recovery boosts tax receipts, the IMF projects the US structural deficit to still be around 4.4% in 2013.

My son recently asked me what I thought was the most important document in US history. There are a lot to choose from, but of all the possibilities, I picked George Washington’s Farewell Address, written in 1796. The relevance of Washington’s warnings regarding the importance of unity, the threat of political factions, the importance of the separation of powers, the dangers of permanent foreign alliances and the need for public morality and education have not diminished with time. One entire section in Washington’s Farewell Address is devoted to the use of public credit, and Washington is quite clear about what he thinks about Congress passing the buck to future generations: