Desperate to fend off cuts in military spending, the defenders of the status quo are claiming that potential reductions included in the debt ceiling deal’s sequestration provision would result in huge job losses. In September, Leon Panetta suggested that cuts of up to $1 trillion would increase the nation’s unemployment rate by a full percentage point, and put up to 1.5 million people out of work.

Early last week, the Aerospace Industry of America (AIA) jumped in claiming that “more than one million American jobs could be lost as a result of defense budget cuts if the deficit reduction select committee fails to reach agreement on alternative balanced budget solutions.…”

The media picked up on the AIA’s press release, but their documentation was flimsy, at best: AIA offered up a five-page summary of the research conducted by George Mason University professor Stephen S. Fuller, and a video of the press conference in which Fuller, AIA CEO Marion Blakey, and Tom Buffenbarger, president of the International Association of Machinists and Aerospace Workers, railed against the “devastating impact” (Blakey) of military spending cuts and the “economic turmoil” (Buffenbarger) that would result.

Yesterday, nearly seven weeks after the secretary issued his dire warning, Panetta’s office released the findings of a report from Interindustry Forecasting at the University of Maryland (INFORUM) to buttress their claims.

By then, the counteroffensive was already in full swing. Bill Hartung has one of the better assessments that I’ve seen because it includes Bill’s insight into the inner workings of the military-industrial complex, blended with his characteristic wit. The bottom line, he explains, is that the contractors are doing just fine, and they will be in the future. The claims of massive job losses are just the latest in a string of scaremongering tactics aimed at allowing them to hold onto their loot.

Other opinion writers and columnists have fixed on aspects of the jobs argument that suit their broader purpose. Paul Krugman pushed a predictably Keynesian line (all government spending is good, but non-military spending is better). Others pointed to the hypocrisy of the situational Keynesians, people who generally oppose government spending when it buys road and bridges, but who embrace military spending for its supposedly magical stimulative effects. These are the “believers in the military spending fairy,” explains Dean Baker at the Center for Economic Policy Research.

None of this debate is new. In the late 1940s, Keynesians assailed Harry Truman for questioning whether excessive military spending might drag down the economy. Nonsense, they said. We can afford much more spending, and it will have wonderful stimulative effects, to boot. Many of these same Keynesians claimed that Dwight Eisenhower’s fiscal restraint was forcing the country to fight the Soviets with one arm tied behind its back. (Truman eventually relented, which has earned him the undying respect and admiration of liberal and conservative hawks alike; Ike’s fiscal conservatism, by contrast, has generated only scorn from the same group).

Ronald Reagan was no Keynesian, but he seemed to agree with them when it came to military spending. “Defense is not a budget issue,” he said, “You spend what you need.” And yet, not even the Gipper spent as much as we do today on our military. We are spending more, in inflation-adjusted terms, than at any time since World War II. More than during Korea, more than during Vietnam, and more, even, than in the early 1980s. It is likely that total military spending will be lower in 2012 than 2011, but most of these savings will come from the troop reductions in Iraq and Afghanistan. The Pentagon’s base budget may yet emerge unscathed.

Military spending advocates routinely skirt around such inconvenient facts. Looking at absolute spending, even if adjusted for inflation, they say, obscures the reality that spending as a share of GDP is relatively modest, in historical terms. But the hawks can’t have it both ways: they can’t claim on the one hand that military spending constitutes a very small share of the total economy (and therefore we can spend as much, or more, with ease), and at the same time wail about the massive job losses that would result from cuts in military spending.

In the end, it all comes back to opportunity costs. Unless one believes that every dollar saved from the Pentagon’s budget will be thrown into a huge government money hole in the New Mexico desert, the reality is that at least some–and likely most–of the taxpayers’ dollars that are currently dedicated to the military could be better employed elsewhere. My preference would be for each of us to keep a bit more of the money that we earn, money that we will then choose to spend as we see fit. This new private spending would more than offset the cuts in government spending, given the government’s inherent inefficiencies, dead-weight losses, etc. Yes, some workers might lose jobs in the near term, but, as Gordon Adams notes, the economy has recovered from a number of previous military build downs, which were deeper and faster than those envisioned today.

Finally, we should embrace the discipline that even modest fiscal constraints can have on our grand strategy. The most “draconian” cuts envisioned under sequestration would take the military’s budget back to 2007 levels–hardly a “lean” year for the defense industry–but policymakers are likely to pay more attention to how they allocate resources if they perceive that they have less of them.

During his last few months as the Chairman of the Joint Chiefs of Staff, Adm. Mike Mullen explained that the Pentagon had forgotten how to prioritize during more than a decade of ever-rising budgets. The White House and others in the national security community have as well. I’m confident that shrinking budgets will infuse a measure of prudence and restraint that is long overdue.

Cross-posted from the Skeptics at the National Interest.

In my last post I pointed out that Bill Niskanen, writing in the most recent edition of the Cato Handbook for Policymakers, suggested that the Fed should focus on keeping the economy growing at a nominal rate of around 5 percent per year. This allows for an average annual growth rate of around 3 percent and an annual inflation rate of around 2 percent.

He illustrated the idea with this chart:

This shows how far nominal sales has deviated from the trend of 5.5 percent per year over the last two decades. It ends in early 2008, which was the most recent data available at the time he was writing. According to Niskanen’s theory, values above the line are a sign that monetary policy is too loose, while values below the line are a sign that monetary policy is too tight.

In his analysis, Niskanen focused on the three positive deviations in the chart, which started around 1988, 1999, and 2005, respectively. He argues that too-loose monetary policy during these periods created bubbles, which then popped and sparked recessions.

Karl Smith has helpfully reproduced and extended the chart to the present day. The results are striking:

Here we can see that nominal final sales to domestic purchasers fell way, way below trend starting in late 2008. And not only has it not recovered, it’s actually been falling further behind! Which suggests that according to Niskanen’s rule, monetary policy started to be too tight in mid-2008, and has been too tight ever since.

The latest Fortune magazine contains a page on “The Growing Wealth Gap.” The author, Doris Burke, says, “here are some of the facts.” But they aren’t facts, or even official estimates.
The opening line is, “The top 1% owns 36% of all wealth” as of 2009. Yet the latest figure was 33.8 percent in the Arthur Kennickell’s report on the Federal Reserve’s triennial Survey of Consumer Finances (SCF) and that was for 2007, not 2009. There will never be an estimate for 2009 (the next one is for 2010), so something is obviously fishy.

Using actual SCF estimates instead of Fortune’s made-up numbers, the first column in my table shows that the top 1 percent’s share of household net worth briefly spurted to 34.6 percent in 1995, but subsequently stabilized at 33.9% in 1998, 32.7% in 2001, 33.4% in 2004 and 33.8% in 2007.

An alternative source − a study of estate tax data in June 2004 The National Tax Journal by Wojciech Kopczuk of Columbia University and Emmanuel Saez at UC Berkeley − found the top 1 percent’s wealth share has fallen over the years from 26 percent in 1939 to 24.4 percent in 1962, 22% in 1989 to 20.8% in 2000 (shown in the table as 2001). The press repeatedly cites Saez’s estimates of the top 1 percent’s average income up until 2007 (since top incomes fell by 19.7 percent in 2008 and by a similar amount in 2009), but nobody ever mentions Saez’s estimates about the top 1 percent’s share of wealth.

So where did Fortune’s estimate of 36% (actually 35.6%) come from? The author cites the left-of-center Economic Policy Institute (EPI), which turns out to mean a paper by Sylvia Allegretto. (Fortune’s more amateurish sources include Deloitte and somebody named Mark Kroll). The EPI estimates, shown in the second column of the table, purport to be from the SCF but are simply mysterious. The dates were supposedly “chosen based on the data available,” but there is no data for 2009 while there is data for the strangely missing years of 1992 and 1995. Ironically, these enigmatic EPI estimates show the top 1 percent’s share of wealth declining since 1989 or 1998, which is not the impression that the EPI or Fortune hope to convey.

To fabricate a number for 2009, Ms. Allegretto relies on her own “author’s analysis” of an “unpublished analysis” by Ed Wolff “prepared for” the EPI but not on the website of Wolff or the EPI. Allegretto’s inexplicable analysis of Wolff’’s invisible analysis supposedly “updates” the official figures “based on changes in asset prices between 2007 and 2009 using Federal Reserve Flow of Funds data.” But changes in the flow of funds estimates are also rough and incomparable with the SCF, partly because they combine households with nonprofit organizations and unincorporated businesses.

Financial assets of households and nonprofits were worth $78.6 trillion at the end of 2007, according to the flow of funds, while homes were worth only $20.9 trillion and half of that was mortgaged. Allegretto implies that the top 1 percent’s share rose in 2009 because the flow of funds’ estimated 18 percent drop in the value of homes from 2007 to 2009 supposedly exceeded the drop in the value of assets that dominate the top 1 percent’s assets in 2007 – such as unincorporated business (whose value fell by 28.7 percent) and stocks (down 23.5 percent). Even if the flow of funds data confirmed the allegedly greater drop in home values than in, say, stocks, Allegretto’s own figures (her Table 6) show that stocks accounted for 30.8 percent of the wealth of the bottom 95 percent, but only 19.2 percent for the top 1 percent. In any case, home equity is too modest fraction of total wealth to drive the top 1 percent’s share upward at a time when stocks and small businesses were crashing. There is ample evidence (e.g., my forthcoming Wall Street Journal article updating the “new” CBO estimates to 2009) that recessions always drive down the top 1 percent’s share of both wealth and income. For those who obsess over the top 1 percent’s share, including the CBO and the Occupy Wall Street crowd, deep recessions should properly be celebrated as a wonderful decline in “inequality” by their twisted definition.

Fortune does not know what the top 1 percent’s share of wealth was in 2009, and it never will (because the next SCF survey will be for 2010). When the 2010 results are released, however, the top 1 percent’s wealth share will surely be lower than it was in 2007, not higher.

Economist David Beckworth and conservative commentator Ramesh Ponnuru have an interesting piece in the New Republic blaming the Federal Reserve’s unduly tight monetary policy for the recent recession and current slow recovery:

For the 25 years leading up to our current mess—the period economists have come to call “the great moderation”—the Fed did a pretty good job of stabilizing the economy. The result of its monetary policies was that the economy, measured in current-dollar or “nominal” terms, grew at about 5 percent a year, with inflation accounting for 2 percent of the increase and real economic growth 3 percent. Keeping nominal spending and nominal income on a predictable path is important for two reasons. First, most debts, such as mortgages, are contracted in nominal terms, so an unexpected slowdown in nominal income growth increases their burden. Also, the difficulty of adjusting nominal prices makes the business cycle more severe. If workers resist nominal wage cuts during a deflation, for example, mass unemployment results.

During the great moderation, people began to expect spending and incomes to grow at a stable rate and made borrowing decisions based on it. But maintaining this stability requires the Fed to increase the money supply whenever the demand for money balances—people’s preference for cash over other assets—increases. This happened in 2008 when, as a result of the recession and the financial crisis, fearful Americans began to hold their cash. The Federal Reserve, first worried about increased commodity prices as a harbinger of inflation and then focused on saving the financial system, failed to increase the money supply enough to offset this shift in demand and allowed nominal spending to fall through mid-2009.

That drop in nominal spending was the most severe decline since 1938. Since then, none of the Fed’s much-debated moves toward monetary ease have brought nominal spending back to where it would have been had the expected 5 percent growth been maintained all along. Consequently, incomes are lower, debt burdens are higher, and banks are weaker than they should be.

Beckworth and Ponnuru’s focus on maintaining a steady growth in nominal GDP is very similar to the position espoused by the late Bill Niskanen. Writing in the most recent edition of the Cato Handbook for Policymakers, Niskanen called for the Fed to maintain the growth of nominal domestic spending:

The intent of Congress would be better served and monetary policy would be more effective if Congress instructed the Federal Reserve to establish a monetary policy that reflects both their concerns in a single target. The best such target, I suggest, would be the nominal final sales to domestic purchasers—the sum of nominal gross domestic product plus imports minus exports minus the change in private inventories. First, this is a feasible target: nominal final sales to U.S.-based purchasers are almost completely determined by U.S. monetary policy, whereas the rate of economic growth and the inflation rate are separately affected by a variety of domestic and foreign conditions. Second, this target provides the correct incentives: for any rate of increase in final sales, a reduction of the inflation rate increases the rate of economic growth. Congress is best advised (1) to specify a target rate of increase of final sales and (2) to instruct the Federal Reserve to minimize the variance around this target rate. The target rate of increase of final sales may best be about 5 percent a year, sufficient to finance a realistic rate of economic growth of 3 percent and an acceptable rate of inflation of about 2 percent.

For the past 20 years, actual final sales increased at a 5.4 percent annual rate with an average inflation rate of 2.4 percent, illustrating that a 5 percent annual increase of final sales would be both feasible and a slightly superior target. The primary problem of U.S. monetary policy during this period, as illustrated by Figure 36.1, is that the Federal Reserve overreacted to three financial crises, creating three ‘‘bubbles’’ of aggregate demand—the correction of which caused two subsequent shallow recessions and, most likely, a third.

Niskanen was writing in mid-2008, before the full extent of the financial crisis had become apparent. He worried that the Fed was over-reacting with easy money:

Most of the variation in demand during the past 20 years has been triggered by the Fed’s response to financial crises. A second lesson is that the Fed seems to overreact. A reasonable standard by which to judge the Fed’s response to a financial crisis would be to avoid a decline in the growth of demand relative to the target path. Instead, the Fed’s response to financial crises has led demand to increase relative to the target path. A third lesson is that the necessary measures to deflate the demand bubbles caused by overreacting to financial crises should be expected to lead to a recession.

“This story is not yet over,” Niskanen wrote. The fall in nominal spending in 2008-09 cited by Beckworth and Ponnuru suggests that the Fed may have underreacted to an unusually severe financial crisis.

As I spend a lot of time pointing out how various government proposals are either useless or outright harmful, some of my friends get the impression that I am against ever doing anything. Keeping in mind that I do firmly believe nothing should always be an option (ever hear of “first do no harm”), here’s what we should do to help correct the housing market:

1. Speed up the foreclosure process. The massive shadow inventory of homes yet to hit the market, numbering in the millions, is keeping potential buyers on the sidelines. Why buy now when a future massive increase in supply will likely depress prices more? It is best to get that supply to the market now. We also, by my estimate, have about 500,000 borrowers still in their homes that have not made a single payment in over 2 years. These borrowers will likely never get current. 

2. State Attorneys General need to either put-up or shut-up. Holding back lending by depressing bank equity values, and not to mention dragging out the foreclosure process, is a massive 50 state targeting of bank foreclosure practices. If the state AGs have some real evidence, then why aren’t we in court? Either the AGs should go to court, where we can all see the facts, or they should drop what only looks like a shakedown.

3. The Fed should start raising rates. First, what bank wants to make a mortgage at 4% when their cost of funds in a few years will easily be above that? Just like any price ceiling, artificially low rates cause shortages. In this case current Fed policies are reducing the supply of credit, making it harder for potential borrowers to get mortgages (yes, if you can get a mortgage, the price is great). When rates do go up, which they will, such will put downward pressure on prices, better to take that hit now.

4. Subsidize moving on, not staying put. While I am against spending any more tax dollars trying to delay the adjustment of the housing market, if we are going to spend billions, we’d be better off helping to pay households’ rents in a new unit, preferably in a new city where they might have a better chance at finding a job. We should be helping families adjust, not remain stuck in limbo.

5. Exercise recourse when possible. Many federal loans, like FHA, have a recourse option. In the case where borrowers can pay, but simply don’t want to (due to price declines or otherwise), they should be held to account. When FDR did mass re-fis and modifications in 1930s, he also demanded strong recourse, which was regularly exercised. If its harmful for a bank to start a foreclosure, then it’s also harmful for a borrower, who can avoid it, to also do so.

For the sake of brevity, I will continue this list in the future. I suspect I’ve given interested parties plenty here already to debate.

I’m pleased to announce the immediate launch of Lib​er​tar​i​an​ism​.org, a new project from the Cato Institute.

Libertarianism is more than a set of policies about education, health care, defense, and trade. Behind those, providing their foundation, are ideas and history, the writings and actions of great men and women who have argued and fought for liberty. The mission of Lib​er​tar​i​an​ism​.org is to express and discuss those ideas directly.

There’s a great deal to explore on the site. You can watch never-before-seen videos of talks by Friedrich Hayek, Milton Friedman, Murray Rothbard, and Joan Kennedy Taylor, and read the first in a new series of weekly columns from George H. Smith.

I’ve written an introductory blog post with highlights–but I encourage you to just click over and look around.

And over the coming days, weeks, months, and years, we’ll be adding much more to Lib​er​tar​i​an​ism​.org, including new videos, books, and essays. If you’d like to stay up to date, we’re on Facebook and Twitter.

So welcome to Lib​er​tar​i​an​ism​.org. I hope you’ll stick around for a while, come back often, and join us in exploring the theory and history of liberty.

One reason to shift infrastructure financing to the private sector is that governments and their contractors often give taxpayers the shaft. They say a big project will cost a certain amount, but then the project gets underway and they reveal that—whoops!—the project actually costs much more. No one gets fired, the money has been spent, taxes and debt have been increased, and officials move onto the next boondoggle.

Here is a 2009 essay on the topic, and here are a few recent examples that have piled up on my desk:

• High-Speed Rail. California voters approved bond funding for what they were promised was a $43 billion rail project in 2008. But a new report by the plan’s sponsors shows that the project is now expected to cost $98 billion, although part of the higher cost estimate reflects inflation.
• Air Traffic Control. “The Federal Aviation Administration continues to struggle with budgets, deadlines, and management of its multi-billion dollar upgrades to the nation’s air traffic control systems.” One project — the En Route Automatic Modernization system — “is about five years behind schedule and as much as $500 million over budget.”
• FBI Computer System. “The Sept. 11, 2001, attacks exposed the FBI’s troubles with information sharing, and the bureau accelerated plans to replace its unwieldy case-management system with new software. That technology project was called Trilogy and was supposed to deliver software called Virtual Case File that was to help FBI agents share investigative documents electronically. The inspector general called the project a fiasco and said the FBI and its contractors wasted $170 million and three years.” The FBI then launched a new project, Sentinel, but by last Fall the new system was already two years behind schedule and $100 million over budget.
• Washington Bicycle Trail. “The cost to rebuild the Capital Crescent Trail along a future Purple Line has ballooned from an estimated $65 million to $103 million, almost half of which would be spent to squeeze the trail and light-rail trains through a tunnel in downtown Bethesda.” Wow! That’s got to be the world’s most expensive bicycle trail at $103 million.
• Washington, D.C. Subway. The final bill isn’t in yet on the Metro’s Silver line to Dulles Airport, and the cost of the proposed Purple Line has crept up only modestly, but the precedents aren’t good. Historian Zachary Schrag found that the cost of the original system in 1969 soared from a promised $2.5 billion to $3.8 billion. Schrag comes to a similar conclusion as I have: “It is kind of a vicious spiral where people low-ball the estimates to get their project approved,” he told the WaPo.