The Ron Paul Vote

It has little to do with the Texas congressman.

By DANIEL HENNINGER

As if they didn't have troubles enough, the Republicans have not one, but two Ron Paul problems.

The first is a cranky congressman from Texas named Ron Paul who won't disown a third-party spoiler candidacy. The second problem is the Ron Paul vote, which as we'll see has little to do with Ron Paul.

The congressman named Ron Paul has served in the House off and on since the 1970s to no discernible effect. Every four years he runs for president, tapping into a vestigial base of Newsletter Libertarians, whose support qualifies him for the debates.

Let no one deny that swimming eternally amid the rightward waves of American politics is an ever-present school of fish that would solve Washington's spending problem mainly with cuts in the defense budget (ending foreign "entanglements"), set a place at the nuclear table for Iran ("Who are they going to bomb?"), cut Israel loose, cut the Federal Reserve loose, and legalize many currently controlled substances.

The Ron Paul vote is a separate matter. In June, polling put the familiar Mr. Paul at about 5.5% for the Iowa caucus and 8% nationally. That would be his normal ceiling. Suddenly, Ron Paul is the Iowa front-runner at over 22.5% and is up to 12% nationally. Why?

Daniel Henninger writes in The Wall Street Journal's Wonder Land column that it has little to do with the Texas congressman.

Is this surge a vote for the congressman named Ron Paul? Impossible. It's in fact the Republican Party protest vote. Since summer, this block of votes has jumped from one candidate to another, desperate for an anti-Obama champion whose anti-Washington intensity matches its own.

In July the Republican protest vote fixed on Michele Bachmann, who materialized in the No. 2 spot. In September it became the Perry vote, cresting at 31%. He couldn't debate, so in October it became the Cain vote. When he collapsed, the "left for dead" Gingrich candidacy miraculously rose to 35%. With Newt carpet-bombed and again left for dead, the GOP protest vote mounted its last pony, the Ron Paul campaign.

The policy set of any of these candidates has been of minimal importance to voters who've boiled down their beef with Washington to one idea: Attack.

Meanwhile Mitt the Whale swims serenely onward at 25%, month after month, dipping occasionally to feed on these pilot fish. But the whale should be worried. These Republican protest fish have sharp teeth. Unless fed something soon, they may tear the Romney campaign to pieces. And there are a lot of them.

Political commentary sometimes refers to one of these second-tier candidates as appealing to "the tea party vote." This is intended as condescension—you know, it's those people who gave the Republicans Christine O'Donnell, Joe Miller and Sharron Angle in 2010. Ah, yes, 2010.

In the no-longer-mentioned November 2010 elections, the often disrespected "tea party vote" handed the Republican Party a victory of historic magnitude and depth. Republicans gained control of the House of Representatives but also won state offices on a scale not seen since the Great Depression.

The 2010 election was the result of a coalition that extends well past the formal tea parties. It combines Republicans of all stripes, libertarians, independents and worried centrist Democrats. They all are "fiscally conservative" and socially all over the map. The Republican nominee, however, will be produced by only one part of this fiscal-conservative coalition—the angriest, most politically committed Republicans and libertarians.

The Paul candidacy is of course doomed. But the Paul vote won't die. This vote has been building in the depths of the American political ocean since the spending spree of the second Bush term. These people see the upward spending trend in annual outlays and accumulated commitments not as a "problem," as the Beltway prefers, but as a threat to their well-being.

The Romney campaign may assume that this vote must land by default in their man's lap. By the relentless logic of the Romney camp, that's true. But if we've learned anything the past several months, it's that this is one of the most volatile Republican electorates in a long while.

Mr. Romney is running a campaign strategy indeed targeted at the broad fiscal conservative coalition that emerged in 2010: Hold the worried independents and centrist Democrats by avoiding what in his Dec. 24 Wall Street Journal Weekend Interview he called "incendiary things." OK, we get that. Independent voters are easily flustered, dependent as they are on the policies of strangers.

But if the former Massachusetts governor doesn't reach out pretty soon to the Paul-Perry-Bachmann Republican protest voters, he may never get them. The longer he waits, the more pressure will build for a third-party challenge that will cost him the election. That it would be led by a Ron Paul or Donald Trump is irrelevant to why these people would vote third party—or stay home.

Mr. Romney is going to have to take a risk with some piece of his locked-down strategy—the RomneyCare denial, the "middle-class" ceiling on his tax cut, naming a running mate who could have beaten him in the primaries.

Mr. Romney needs to give these Republicans a reason to come in his direction, before they walk away from him forever.

Write to henninger@wsj.com

The 111th Congress's Final Insult

REVIEW & OUTLOOK
Wall Street Journal

Bluto Blutarsky must have been an Appropriator.

The 111th Congress began with an $814 billion stimulus that blew out the federal balance sheet, so we suppose it's only fitting that the Members want to exit by passing a 1,924-page, $1.2 trillion omnibus spending bill. The worst Congress in modern history is true to its essence to the bitter end.

Think of this as a political version of the final scene in "Animal House," when the boys from the Delta frat react to their expulsion by busting up the local town parade for the sheer mayhem of it. Bluto Blutarsky (John Belushi) did go on to be a U.S. Senator in the film, and a man of his vision must have earned a seat on Appropriations.

Democrats have had 11 months to write a budget for fiscal 2011, which began on October 1. But Majority Leader Harry Reid and Appropriations Chairman Daniel Inouye have dumped this trillion-dollar baby on Senators at the very last minute, when everyone is busy and wants to go home for the holidays. No doubt that was the plan. The continuing resolution to fund the government expires on Saturday, so Mr. Reid wants to squeeze Senators against the deadline. And with the press corps preoccupied by the tax debate, the spending bill is greased to slide through with little or no public scrutiny.

Defenders argue that the bill is restrained because it freezes overall spending for federal agencies at 2010 levels. But 2010 was an inflated budget with a $1.3 trillion deficit. Paul Ryan, soon to be House Budget Chairman, notes that nondefense discretionary spending rose 24% over those two years. Add stimulus funding and federal agency spending soared to $796 billion in 2010 from $434 billion, an 84% spending increase. (See nearby table.) Republicans have promised to return to 2008 spending levels, and the omnibus will make that much harder.

Then there are the pork and policy riders, such as a food safety bill with new authority for the Food and Drug Administration. The bill's 6,630 earmarks will cost more than $8.1 billion, according to Citizens Against Government Waste. While that's fewer than in 2009, what happened to the earmark ban promised by Republicans and supported by President Obama?

The late John Murtha of Pennsylvania is so powerful he's still getting pork from his grave: $10 million for the John Murtha Foundation. Ted Kennedy also scored a legacy earmark. The omnibus includes $8 million for the Edward M. Kennedy Institute secured by Congressman Ed Markey (D., Mass.). Thad Cochran of Mississippi, one of the GOP Senators who may vote for the bill, secured $6 million for the Mississippi Polymer Institute at the University of Southern Mississippi.
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The bill makes a special effort to pad spending for programs likely to be targeted by Republicans next year, so any future cuts will occur off a larger baseline. That includes $36 million more for public broadcasting, $1.5 billion for high-speed rail projects that many states say they can't afford, and $3 billion for green energy pork.

Republicans should be especially upset with the $1.1 billion to implement phase one of ObamaCare. This gives the Administration's bureaucracy a running start and means that Republicans will have to pass new legislation to rescind the funding—which Mr. Obama will veto. Why would Republicans vote for a bill that makes it harder for them to achieve one of their main political goals?

We're told that at least six and perhaps as many as 10 Republican Senators may give Mr. Reid the votes he needs to pass this monstrosity. That list includes Susan Collins of Maine, Mr. Cochran, and looming retirees Kit Bond of Missouri, Bob Bennett of Utah and George Voinovich of Ohio. This is the same Senator Voinovich who yesterday voted against extending the Bush-era tax rates on grounds that they are unaffordable.

Mr. Voinovich is retiring with this Congress, and if there were any justice in politics taxpayers could revoke his pension. As for Mr. Bennett, this vote explains his re-election defeat.

The sliver of good news is that Republican Senators Jim DeMint of South Carolina and Tom Coburn of Oklahoma say they'll insist that this epic be read aloud on the Senate floor. That should slow down Mr. Reid and his bipartisan posse for a day or two. Perhaps if voters learn what's in it, they will turn enough Senators against it to save the day. Republicans should hold out for a clean budget with no earmarks that funds agencies at last year's level for an additional 45 to 60 days. They can then get busy cutting in January. If Mr. Obama wanted to help his fiscal credentials, he'd veto the omnibus and demand the same thing.

But don't count on any miracles. The 111th Congress has shown contempt for taxpayers from its first day, which is why it was so repudiated on November 2 and why Gallup found this week that Congress's approval rating has hit a record low of 13%. Which raises the question: Who are those 13%? At least "Animal House" was funny.

Why Obamanomics Has Failed

Uncertainty about future taxes and regulations is enemy No. 1 of economic growth.

By ALLAN H. MELTZER

The administration's stimulus program has failed. Growth is slow and unemployment remains high. The president, his friends and advisers talk endlessly about the circumstances they inherited as a way of avoiding responsibility for the 18 months for which they are responsible.

But they want new stimulus measures—which is convincing evidence that they too recognize that the earlier measures failed. And so the U.S. was odd-man out at the G-20 meeting over the weekend, continuing to call for more government spending in the face of European resistance.

The contrast with President Reagan's antirecession and pro-growth measures in 1981 is striking. Reagan reduced marginal and corporate tax rates and slowed the growth of nondefense spending. Recovery began about a year later. After 18 months, the economy grew more than 9% and it continued to expand above trend rates.

Two overarching reasons explain the failure of Obamanomics. First, administration economists and their outside supporters neglected the longer-term costs and consequences of their actions. Second, the administration and Congress have through their deeds and words heightened uncertainty about the economic future. High uncertainty is the enemy of investment and growth.

Most of the earlier spending was a very short-term response to long-term problems. One piece financed temporary tax cuts. This was a mistake, and ignores the role of expectations in the economy. Economic theory predicts that temporary tax cuts have little effect on spending. Unless tax cuts are expected to last, consumers save the proceeds and pay down debt. Experience with past temporary tax reductions, as in the Carter and first Bush presidencies, confirms this outcome.

Another large part of the stimulus went to relieve state and local governments of their budget deficits. Transferring a deficit from the state to the federal government changes very little. Some teachers and police got an additional year of employment, but their gain is temporary. Any benefits to them must be balanced against the negative effect of the increased public debt and the temporary nature of the transfer.

The Obama economic team ignored past history. The two most successful fiscal stimulus programs since World War II—under Kennedy-Johnson and Reagan—took the form of permanent reductions in corporate and marginal tax rates. Economist Arthur Okun, who had a major role in developing the Kennedy-Johnson program, later analyzed the effect of individual items. He concluded that corporate tax reduction was most effective.

Another defect of Obamanomics was that part of the increased spending authorized by the 2009 stimulus bill was held back. Remember the oft-repeated claim that the spending would go for "shovel ready" projects? That didn't happen, though spending will flow more rapidly now in an effort to lower unemployment and claim economic success during the fall election campaign.

In his January 2010 State of the Union address, President Obama recognized that the United States must increase exports. He was right, but he has done little to help, either by encouraging investment to increase productivity, or by supporting trade agreements, despite his promise to the Koreans that he repeated in Toronto. Export earnings are the only way to service our massive foreign borrowing. This should be a high priority. Isn't anyone in the government thinking about the future?

Mr. Obama has denied the cost burden on business from his health-care program, but business is aware that it is likely to be large. How large? That's part of the uncertainty that employers face if they hire additional labor.

The president asks for cap and trade. That's more cost and more uncertainty. Who will be forced to pay? What will it do to costs here compared to foreign producers? We should not expect businesses to invest in new, export-led growth when uncertainty about future costs is so large.

Then there is Medicaid, the medical program for those with lower incomes. In the past, states paid about half of the cost, and they are responsible for 20% of the additional cost imposed by the program's expansion. But almost all the states must balance their budgets, and the new Medicaid spending mandated by ObamaCare comes at a time when states face large deficits and even larger unfunded liabilities for pensions. All this only adds to uncertainty about taxes and spending.

Other aspects of the Obama economic program are equally problematic. The auto bailouts ran roughshod over the rule of law. Chrysler bondholders were given short shrift in order to benefit the auto workers union. By weakening the rule of law, the president opened the way to great mischief and increased investors' and producers' uncertainty. That's not the way to get more investment and employment.

Almost daily, Mr. Obama uses his rhetorical skill to castigate businessmen who have the audacity to hope for profitable opportunities. No president since Franklin Roosevelt has taken that route. President Roosevelt slowed recovery in 1938-40 until the war by creating uncertainty about his objectives. It was harmful then, and it's harmful now.

In 1980, I had the privilege of advising Prime Minister Margaret Thatcher to ignore the demands of 360 British economists who made the outrageous claim that Britain would never (yes, never) recover from her decision to reduce government spending during a severe recession. They wanted more spending. She responded with a speech promising to stay with her tight budget. She kept a sustained focus on long-term problems. Expectations about the economy's future improved, and the recovery soon began.

That's what the U.S. needs now. Not major cuts in current spending, but a credible plan showing that authorities will not wait for a fiscal crisis but begin to act prudently and continue until deficits disappear, and the debt is below 60% of GDP. Rep. Paul Ryan (R., Wisc.) offered a plan, but the administration and Congress ignored it.

The country does not need more of the same. Successful leaders give the public reason to believe that they have a long-term program to bring a better tomorrow. Let's plan our way out of our explosive deficits and our hesitant and jobless recovery by reducing uncertainty and encouraging growth.

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Mr. Meltzer is a professor of economics at Carnegie Mellon University, a visiting scholar at the American Enterprise Institute, and the author of "A History of the Federal Reserve" (University of Chicago Press, 2003 and 2010).

The Cap and Tax Fiction

REVIEW & OUTLOOK - Wall Street Journal

Democrats off-loading economics to pass climate change bill.

House Speaker Nancy Pelosi has put cap-and-trade legislation on a forced march through the House, and the bill may get a full vote as early as Friday. It looks as if the Democrats will have to destroy the discipline of economics to get it done.

Despite House Energy and Commerce Chairman Henry Waxman's many payoffs to Members, rural and Blue Dog Democrats remain wary of voting for a bill that will impose crushing costs on their home-district businesses and consumers. The leadership's solution to this problem is to simply claim the bill defies the laws of economics.

Their gambit got a boost this week, when the Congressional Budget Office did an analysis of what has come to be known as the Waxman-Markey bill. According to the CBO, the climate legislation would cost the average household only $175 a year by 2020. Edward Markey, Mr. Waxman's co-author, instantly set to crowing that the cost of upending the entire energy economy would be no more than a postage stamp a day for the average household. Amazing. A closer look at the CBO analysis finds that it contains so many caveats as to render it useless.

For starters, the CBO estimate is a one-year snapshot of taxes that will extend to infinity. Under a cap-and-trade system, government sets a cap on the total amount of carbon that can be emitted nationally; companies then buy or sell permits to emit CO2. The cap gets cranked down over time to reduce total carbon emissions.

To get support for his bill, Mr. Waxman was forced to water down the cap in early years to please rural Democrats, and then severely ratchet it up in later years to please liberal Democrats. The CBO's analysis looks solely at the year 2020, before most of the tough restrictions kick in. As the cap is tightened and companies are stripped of initial opportunities to "offset" their emissions, the price of permits will skyrocket beyond the CBO estimate of $28 per ton of carbon. The corporate costs of buying these expensive permits will be passed to consumers.

The biggest doozy in the CBO analysis was its extraordinary decision to look only at the day-to-day costs of operating a trading program, rather than the wider consequences energy restriction would have on the economy. The CBO acknowledges this in a footnote: "The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap."

The hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.

When the Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the economy with and without the carbon tax. Under this more comprehensive scenario, it found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035.

Note also that the CBO analysis is an average for the country as a whole. It doesn't take into account the fact that certain regions and populations will be more severely hit than others -- manufacturing states more than service states; coal producing states more than states that rely on hydro or natural gas. Low-income Americans, who devote more of their disposable income to energy, have more to lose than high-income families.

Even as Democrats have promised that this cap-and-trade legislation won't pinch wallets, behind the scenes they've acknowledged the energy price tsunami that is coming. During the brief few days in which the bill was debated in the House Energy Committee, Republicans offered three amendments: one to suspend the program if gas hit $5 a gallon; one to suspend the program if electricity prices rose 10% over 2009; and one to suspend the program if unemployment rates hit 15%. Democrats defeated all of them.

The reality is that cost estimates for climate legislation are as unreliable as the models predicting climate change. What comes out of the computer is a function of what politicians type in. A better indicator might be what other countries are already experiencing. Britain's Taxpayer Alliance estimates the average family there is paying nearly $1,300 a year in green taxes for carbon-cutting programs in effect only a few years.

Americans should know that those Members who vote for this climate bill are voting for what is likely to be the biggest tax in American history. Even Democrats can't repeal that reality.