Politicians beyond New York continued to stake out positions Tuesday on the controversy over plans to build an Islamic center and mosque near the site of the World Trade Center, but divisions emerged within each party over what has become a surprise issue in the 2010 elections.

In Pennsylvania’s closely contested Senate race, the Democratic candidate, Rep. Joe Sestak, appeared with New York Mayor Michael Bloomberg and endorsed the rights of project organizers to construct the Islamic center at its proposed location. Mr. Sestak’s position put him at odds with several other candidates in his own party, including Senate Majority Leader Harry Reid, who on Monday announced his opposition to the mosque’s being built near the site of the destroyed towers in Manhattan.

The issue dominated a news conference Tuesday in which Mr. Bloomberg endorsed Mr. Sestak’s Senate bid. Mr. Sestak, who had won the Democratic nomination over the opposition of Senate leaders and the White House, appeared pleased to once again highlight a difference between himself and Mr. Reid.

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We don’t have alternative universe laboratories to run control bailout experiments, but we can imagine the alternative outcomes if different actions were taken.

So let’s do just that. Imagine a nation in the midst of an economic crisis, circa September-December 2008. Only this time, there are key differences: 1) A President who understood Capitalism requires insolvent firms to suffer failure (as opposed to a lame duck running out the clock); 2) A Treasury Secretary who was not a former Goldman Sachs CEO, with a misguided sympathy for Wall Street firms at risk of failure (as opposed to overseeing the greatest wealth transfer in human history); 3) A Federal Reserve Chairman who understood the limits of the Federal Reserve (versus a massive expansion of its power and balance sheet).

In my counter factual, the bailouts did not occur. Instead of the Japanese model, the US government went the Swedish route of banking crises: They stepped in with temporary nationalizations, prepackaged bankruptcies, and financial reorganizations; banks write down all of their bad debt, they sell off the paper. Int he end, the goal is to spin out clean, well financed, toxic-asset-free banks into the public markets.

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What started as a local zoning debate about an Islamic center near Ground Zero, and then morphed into a fight over religious expression, has now turned into an election-year political brawl.

Caught in the middle of the rancorous partisan fight are American Muslims, whose own voices have been drowned out by politicians on both the left and the right.

“In a fundamental sense, this is not a conversation about Muslims,”said Omid Safi, professor of Islamic studies at the University of North Carolina at Chapel Hill. “This is a conversation in which the Muslims are being used as the football with which to play the game of competing visions of America.”

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Last Friday, at the start of Ramadan, President Obama presided over the White House’s annual iftar dinner and made some rather bland remarks about religious freedom. The context, of course, was the controversy over the proposed mosque in Lower Manhattan, which is not, as Obama insisted, about freedom of religion but about religious tolerance. And then, having once again gotten high praise for so very little, he went to bed a panicked man and reached, trembling, some hours later, for a political morning-after pill to take back some of what he had said. Whew, for a moment there he was pregnant with principle.

No more. “I was not commenting, and I will not comment, on the wisdom of making the decision to put a mosque there,” Obama said in revising and extending and eviscerating his remarks of the previous night. He had merely been commenting on freedom of religion. Turns out he’s for it.

The president muddled his message. Does he not grasp that questioning the “wisdom” of the mosque’s placement is predicated on thinking that 9/11 was a Muslim crime? Does he not understand that the issue here is religious prejudice, not zoning? The answer, of course, is that he does. But unlike Henry Clay, he would rather be president than right.

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What would the contours and outline of comprehensive immigration legislation based on these biblical principles look like? The Bible tells us God has ordained the civil powers (the government) to punish lawbreakers and to reward those who obey the law (Romans 13:1-7). Unfortunately, the U.S. government has not respected its own immigration laws enough to enforce them consistently for more than two decades (since President Reagan’s amnesty of illegal aliens in 1986). The government has not controlled the borders. The reality has been that too often, those who desire to enter our country illegally have encountered two apparently contradictory signs at our border: one saying “No Trespassing” and the other saying “Help Wanted.”

Any immigration reform that will generate sufficient public support to pass Congress must begin with securing the border first, then deal in a constructive and compassionate way with the 12 million undocumented workers already in the United States.

The failure of the 2006 effort shows reform must be done sequentially, not simultaneously. The people do not trust the government to commit the resources necessary to secure the border. The government will have to demonstrate its commitment by securing the border first.

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As if there weren’t enough hot-button issues for debate in the 2010 midterm elections, Social Security is emerging as another one.

Democrats have been taking the offensive, apparently hoping to use the issue to their advantage as they fight to maintain control of Congress. They’re emphasizing the program’s popularity among Americans, their commitment to protecting it, and their contention that Republicans want to change Social Security to its detriment.

Social Security’s 75th anniversary is Saturday, and Democrats have tied some of their efforts to that milestone. President Obama, for one, talked about Social Security during his weekly address on Saturday.

“We have an obligation … to safeguard Social Security for our seniors, people with disabilities, and all Americans ”“ today, tomorrow, and forever,” he said. “But what we can’t afford to do is privatize Social Security.”

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One problem that dogged Japan during its lost decade was a stop-and-go fiscal policy in which stimulus packages were administered in an “on again, off again” fashion and taxes were lowered and then raised. There is a risk that the U.S. could fall into this trap in an effort to strike a balance between short-term fiscal support and long-term budget integrity.

This strongly suggests that congressional leaders of both parties should embrace a pro-growth fiscal reform that would help to create long-run fiscal stability and foster certainty about future tax rates. With the 2001-2003 tax cuts set to expire at the end of 2010, the time is now to move ahead with broad-based reform.

A good starting point would be the bipartisan Wyden-Gregg tax reform bill. This bill is not incredibly bold, but is probably the best we could do in the current environment and is much better than the current tax code.

Wyden-Gregg would be revenue-neutral; it would simplify the tax code by reducing the number of personal income tax brackets to three from six and would do so without raising marginal income tax rates.

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Underpinning the gloom: Nearly two-thirds of Americans believe the economy has yet to hit bottom, a sharply higher percentage than the 53% who felt that way in January.

The sour national mood appears all-encompassing and is dragging down ratings for the GOP too, suggesting voters above all are disenchanted with the political establishment in Washington. Just 24% express positive feelings about the Republican Party, a new low in the 21-year history of the Journal’s survey. Democrats are only slightly more popular, but also near an all-time low.

The results likely foreshadow a poor showing in November’s mid-term for Democrats, whose leaders had hoped the public would grow more optimistic about the economy and, as a result, more supportive of the party agenda. Now, despite the weak Republican numbers, the survey shows frustrated voters on the left are less interested than impassioned voters on the right to in the election.

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… applying the brakes to runaway federal spending will not be easy. As the first reaction to [Defense Secretary Robert] Gates’s announcement showed, whatever their proclaimed ideology, local politicians will squeal when their constituents feel the budget ax.

Among the first to challenge Gates’s decision to eliminate the Virginia-based military command was Virginia Gov. Robert McDonnell, a Republican who has not hesitated to trim spending proposals by his Democratic predecessors.

He was joined by the state’s two Democratic senators, Mark Warner and Jim Webb, who talk a good game of budgetary responsibility but squirm when it hits home.

Obama may have thought it was tough work to push Congress into spending all that he wanted for economic stimulus, education and other causes close to his heart. He is about to learn that nudging the lawmakers to trim the budget may be even tougher.

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At another time, the ruling overturning California’s ban on same-sex marriages might have been the political equivalent of an earthquake. Instead, the relatively restrained response underscores both the singular economic focus of this year’s elections and the shifting politics of one of the country’s major social issues.

Neither Democrats nor Republicans appear eager to try to turn the California decision into a November rallying cry. Many Democrats who otherwise strongly support gay rights are still reluctant to advocate for same-sex marriages, President Obama being the most prominent example. Many Republicans believe their conservative base is already well motivated. For now, they prefer to stay away from the kind of wedge-issue politics that were once a hallmark of their campaigns.

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This year, the U.S. public debt is projected to reach 62 percent of the economy””up from 40 percent in 2008 and nearly double the historical average, according to recent Congressional Budget Office (CBO) estimates. The financial crisis and recession drove much of this debt swing, yet larger problems loom in the future.

By 2030, the CBO projects that debt will more than double to 146 percent of GDP.[1] The only good news, if it can be called that, is that the U.S. is not alone. Two recent studies by the International Monetary Fund (IMF) and the Bank for International Settlements (BIS) highlight the significance of the global debt challenge and stress the need for governments to aim higher than short-term deficit reductions. For the U.S., one of the most poorly positioned countries, addressing the long-term debt challenge must include prompt reform of Social Security, Medicare, and Medicaid.

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Read it all. Yves Smith (of the Naked Capitalism blog) speaks for me when she quips: “The worst is he might actually believe his PR”–KSH.

The other day, a citizen went before a House committee and urged its members to stop their burdensome interference with her business. “At its most basic level,” said Annie Duke, “the issue before this committee is personal freedom, the right of individual Americans to do what they want in the privacy of their homes without the intrusion of government.”

I know what you’re expecting: At that point, the politicians all had a good laugh and told her to get lost so they could get back to meddling in people’s lives.

But no. Not only did they hear out the winner of the National Heads-Up Poker Championship, they did exactly what she suggested. The committee voted to lift the federal ban on Internet poker and other online gambling, while approving a measure to tax and regulate it.

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Facing eviction from her Tennessee apartment after several months of unpaid rent, Alexandra Jarrin packed up whatever she could fit into her two-door coupe recently and drove out of town.

Ms. Jarrin, 49, wound up at a motel here, putting down $260 she had managed to scrape together from friends and from selling her living room set, enough for a weeklong stay. It was essentially all the money she had left after her unemployment benefits expired in March. Now she is facing a previously unimaginable situation for a woman who, not that long ago, had a corporate job near New York City and was enrolled in a graduate business school, whose sticker is still emblazoned on her back windshield.

“Barring a miracle, I’m going to be in my car,” she said.

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Personal consumption rose at an annual rate of only 1.6 percent in the second quarter, and consumer spending appears to have softened as the quarter progressed.

“The problem is it looks like the consumer was really weakening in June, so you’re starting the third quarter in a position of weakness,” said David Shulman, senior economist at the UCLA Anderson Forecast. “The components of this report are ugly.”

Meanwhile, a number of factors that boosted economic growth starting last summer are about to run their course.

The second-quarter GDP number, soft though it was, received a one-time boost from businesses building up their inventories (contributing 1.05 percentage points of growth) and federal government spending (0.7 percentage points), both of which are likely to fade. Growth was also supported by a burst of residential investment (adding 0.6 percentage points) — caused by home builders’ rushing to finish projects to take advantage of a home-buyer tax credit — that probably will turn negative in future quarters.

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More specifically, the new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one.

The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. Now, since we have lived beyond our means as a nation for nearly 40 years, our cumulative current-account deficit ”” the combined shortfall on our trade in goods, services and income ”” has reached nearly $8 trillion. That’s borrowed prosperity on an epic scale….

The second unhappy change in the American economy has been the extraordinary growth of our public debt. In 1970 it was just 40 percent of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970. This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.

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….these macroeconomic arguments between policy-makers and intellectuals are blind to obstacles to growth faced on a micro level by real, live entrepreneurs and managers. Confronted with incredible uncertainty about the future business climate brought about by massive regulatory and tax changes, they are sitting on cash instead of investing in capital equipment and, especially, hiring new workers.

White House Chief of Staff Rahm Emanuel famously said never let a crisis go to waste. But the policy changes on health-care and financial services that have emerged from the current crisis, plus the largest tax increase in history that will hit Jan. 1 without Congressional action, are restraining companies, especially mid-to-small-sized ones.

Atlas didn’t shrug; he’s sitting on his hands””and his wallet.

That is the message heard repeatedly from entrepreneurs, their private-equity investors and their wealth managers. And it is becoming increasingly apparent, not so much in the parade of stronger-than-expected second-quarter earnings numbers from Standard & Poor’s 500 companies, but in regional Federal Reserve Bank reports.

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So much for transparency.

Under a little-noticed provision of the recently passed financial-reform legislation, the Securities and Exchange Commission
no longer has to comply with virtually all requests for information releases from the public, including those filed under the Freedom of Information Act.

The law, signed last week by President Obama, exempts the SEC from disclosing records or information derived from “surveillance, risk assessments, or other regulatory and oversight activities.” Given that the SEC is a regulatory body, the provision covers almost every action by the agency, lawyers say. Congress and federal agencies can request information, but the public cannot.

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Senator John Kerry (D-Mass.), chairman of the Communications Subcommittee, said Tuesday that he will introduce an online privacy bill that will create standards for how consumer data is collected and used for marketing. It will also give users more control over how their Internet activity and profiles are accessed by advertisers and Web sites.

Kerry’s bill, announced in a news release during a Senate Commerce Committee hearing on consumer online privacy, comes after two privacy bills were introduced in the House in recent months that would protect sensitive information such as health and financial data unless expressly volunteered to be collected by users. Kerry said he hopes his bill will be passed at the beginning of the next Congress.

The legislative proposals add momentum to a push by consumer groups to create stronger federal rules for how companies such as Facebook, Apple, Amazon and Google can track user activity and place ads based on that information. Facebook faced criticism for creating complex changes to its privacy polices late last year that made some information more available to the public. Apple and AT&T were criticized for a data breach that revealed the network identities of its iPad users. Google said it accidentally snooped on residential Wi-Fi networks around the world as it collected technical information for location-based applications.

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Four decades of experience suggests the only way to wean the nation off its ruinous oil addiction is prices that go up and stay up. And, although it’s a political non-starter for now, the simplest and best way to achieve that is to gradually raise the federal gasoline tax, now 18.4 cents a gallon, where it has been since 1993.

The arguments for a gas-tax increase are no less compelling for their familiarity. Higher taxes would produce substantial revenues ”” roughly $1 billion a year for every extra penny in tax ”” that could be used to fix roads and reduce the budget deficit. They would make fuel-efficient cars more attractive.

Ultimately, higher taxes could help drive alternative technologies that would slow the flow of money to finance some of the world’s worst regimes and multinational oil companies, such as BP.

Whether increasing the gas tax would reduce the need for drilling in environmentally sensitive areas such as the Gulf depends on worldwide demand for oil, which is being driven upward by the rising economies of China and India. But those countries have their own efforts to curb gasoline use, and reducing consumption in the USA, the world’s top oil consumer, is essential.

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We’ve basically decided to keep pumping greenhouse gases into Mother Nature’s operating system and take our chances that the results will be benign ”” even though a vast majority of scientists warn that this will not be so. Fasten your seat belts. As the environmentalist Rob Watson likes to say: “Mother Nature is just chemistry, biology and physics. That’s all she is.” You cannot sweet-talk her. You cannot spin her. You cannot tell her that the oil companies say climate change is a hoax. No, Mother Nature is going to do whatever chemistry, biology and physics dictate, and “Mother Nature always bats last, and she always bats 1.000,” says Watson. Do not mess with Mother Nature. But that is just what we’re doing.

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The administration’s second assumption, meanwhile, is a matter of academic theories about the sizes of the relevant economic multipliers. Textbook Keynesian economics tells us that government-purchases multipliers are larger than tax-cut multipliers. And, as we have seen, the Obama administration’s economic team consulted these standard models in deciding that spending would be significantly more effective than tax cuts.

But a great deal of recent economic evidence calls that conclusion into question. In an ironic twist, one key piece comes from Christina Romer, who is now chair of Obama’s Council of Economic Advisers. About six months before she took the job, Romer teamed up with her husband and fellow Berkeley economist David Romer to write a paper (“The Macroeconomic Effects of Tax Changes”) that sought to measure the influence of tax policy on GDP. Crucial to the Romers’ method was their effort to identify changes in tax policy made during times of relative economic stability, and driven by a desire to influence economic behavior or activity (to encourage growth, say, or reduce a deficit), rather than those changes made in response to a recession or crisis. By studying such “exogenous” tax-policy changes, the Romers could be more confident that they were in fact measuring the effects of taxes and not those of extraneous conditions.

The Romers’ conclusion, which is at odds with most traditional Keynesian analysis, was that the tax multiplier was 3 ”” in other words, that every dollar spent on tax cuts would boost GDP by $3. This would mean that the tax multiplier is roughly three times larger than Obama’s advisors assumed it was during their policy simulations.

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The federal budget deficit, which hit a record $1.4 trillion last year, will exceed that figure this year and again in 2011, according to a White House forecast released Friday.

The $1.47 trillion budget gap predicted for 2010 represents a slight improvement over the administration’s February forecast. But the outlook for 2011 has darkened considerably, primarily due to a drop in expected tax receipts from capital gains.

White House budget director Peter Orszag noted in a conference call with reporters that the president’s budget is still on track to cut the deficit in half, as a percent of annual economic output, by the end of his first term. As the economy improves, the White House forecasts that the deficit will be just over $700 billion in 2013.

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The lowest bracket for the personal income tax, for instance, moves up 50% ”” to 15% from 10%. The next lowest bracket ”” 25% ”” will rise to 28%, and the old 28% bracket will be 31%. At the higher end, the 33% bracket is pushed to 36% and the 35% bracket becomes 39.6%.

But the damage doesn’t stop there.

The marriage penalty also makes a comeback, and the capital gains tax will jump 33% ”” to 20% from 15%. The tax on dividends will go all the way from 15% to 39.6% ”” a 164% increase….
The HSA Withdrawal Tax Hike. “This provision of ObamaCare,” according to ATR, “increases the additional tax on nonmedical early withdrawals from an HSA from 10% to 20%, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10%.”

Brand Name Drug Tax. Makers and importers of brand-name drugs will be liable for a tax of $2.5 billion in 2011. The tax goes to $3 billion a year from 2012 to 2016, then $3.5 billion in 2017 and $4.2 billion in 2018. Beginning in 2019 it falls to $2.8 billion and stays there. And who pays the new drug tax? Patients, in the form of higher prices.

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The Senate gave final approval Wednesday evening to legislation providing added unemployment benefits through November to millions of Americans who have been out of work for six months or more, ending a politically charged fight.

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Battered by high unemployment and record home foreclosures, most Americans seem to have lost faith in another fundamental part of their personal finances: Social Security.

A USA TODAY/Gallup Poll finds that a majority of retirees say they expect their current benefits to be cut, a dramatic increase in the number who hold that view. And a record six of 10 non-retirees predict Social Security won’t be able to pay them benefits when they stop working.

Skepticism is highest among the youngest workers: Three-fourths of those 18 to 34 don’t expect to get a Social Security check when they retire.

The public’s views are more dire than the calculations of Social Security’s trustees. Last year, they projected the system would begin running in the red in 2016, as the Baby Boom generation retired, and the trust fund would be exhausted in 2037.

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U.S. officials need to outline more clearly their plans to reduce the nation’s fiscal deficit, said Stephen Roach, Morgan Stanley’s non-executive chairman for Asia.

“What the markets are ultimately going to want is far more specificity and credibility on deficit reduction and normalization of Fed policy,” Roach, 64, said during a radio interview with Tom Keene on Bloomberg Surveillance.

President Barack Obama said on July 15 his economic- stimulus program is gradually pulling the U.S. out of the economic slump. The nation’s budget deficit is forecast to swell 14 percent this year to a record $1.6 trillion. Obama has said he will offset spending by more than $1.2 trillion over 10 years, partly through a freeze on many domestic programs and more than $800 million in higher taxes and fees on households earning more than $250,000.

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…there is skepticism over the president’s commitment to reducing the huge and dangerous budget deficits which America now faces. A strong step toward deficit reduction next year ”” like undertaking the difficult task of trying to fix Social Security ”” would earn deeper credibility with business and with all Americans.

Another problem is that the administration’s rhetoric ”” which too often employs inflammatory words like “reckless” ”” has the effect of tarring all of business with the same brush. The White House might better distinguish between Wall Street, Big Oil and health insurers, which have all incurred public wrath, and the majority of businesses, which haven’t.

The tension between President Obama and the business community is hurting both sides and may hamper economic recovery. Closing that divide requires the business community to mute its criticism, and the administration to make personnel and policy adjustments. Neither should be hard.

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America is struggling with a sputtering economy and high unemployment ”” but times are booming for Washington’s governing class.

The massive expansion of government under President Barack Obama has basically guaranteed a robust job market for policy professionals, regulators and contractors for years to come. The housing market, boosted by the large number of high-income earners in the area, many working in politics and government, is easily outpacing the markets in most of the country. And there are few signs of economic distress in hotels, restaurants or stores in the D.C. metro area.

As a result, there is a yawning gap between the American people and D.C.’s powerful when it comes to their economic reality ”” and their economic perceptions.

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In the past few days polls have shown Republican challengers taking the lead over previously safe Democratic incumbents, such as Barbara Boxer in California and Russ Feingold in Wisconsin. Indeed, given the uniformly negative direction in the numbers, it is now quite possible the Republicans could win the Senate seats formerly held by both President Obama in Illinois, and Joe Biden, vice-president, in Delaware.

Add to that the continuing woes of Harry Reid, the Senate Democratic majority leader, in Nevada, where the Republican party’s recent nomination of Sharron Angle, a far-right and highly eccentric Tea Party supporter, appear to have had no positive effect on Mr Reid’s prospects, and the Grand Old party has a good shot at taking control of both houses of Congress. Worse for Mr Obama, political scientists say that at this stage in the calendar, there is almost nothing he can do about it.

“If you ask me where the silver lining is for President Obama, I have to say I cannot see one,” says Bill Galston, a former Clinton official, who has been predicting for months the Democrats could lose the House. “Just as BP’s failure to cap the well has been so damaging, Obama’s failure to cap unemployment will be his undoing. There is nothing he can do to affect the jobless rate before November.”

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