Devaluing our way to depression

Byline: | Category: Above the Fold, Culture, Economy, Government, Taxes & Spending | Posted at: Friday, 23 January 2015

Imagine this scenario:  The United States, in an effort to spur exports and boost domestic producers, institutes a tax on foreign imports, some of the proceeds of which go indirectly to exporters to make their goods more affordable in international markets.  Most of Europe then retaliates with tariffs on American exports that raises the cost of American exports in Europe.  Japan does the same, erecting some of the highest tariffs in the world.  Most of China follows suit.  Britain tried to stay aloof of the customs war, but eventually caves, building its own economic borders.

Of course, I’m talking about the interwar period, when in the aftermath of the Great War, the world’s major economies played a game of tariff-one-upsmanship until global trade collapsed and the world entered the Great Depression.

But I’m also talking about today.  Let’s consider what actually happens when a country devalues its currency.  Switzerland, as we discussed last week, by pegging the franc to the dwindling euro, essentially devalued Swiss money 20%.  Swiss consumers and Swiss businesses paid 20% more on imported goods and raw materials.  Swiss exporters weren’t subject to that tax, effectively receiving a 20% subsidy for Swiss items sold domestically and being able to export at a lower cost.  In other words, Switzerland’s attempt at currency devaluation yielded the exact effect of a 20% protective tariff on imports.

Switzerland wasn’t the only major economy doing this.  In fact, the Swiss are the only major economy to have stopped devaluing its currency–to have stopped building a de facto protective tariff around its borders.  The United States has gone through three rounds of quantitative easing, and there are increasing calls for a fourth.  All signs point to Europe doing the same as early as next week.  Japan has been devaluing its currency for twenty years with the same predictable result.

This is what doesn’t make sense:  virtually every economist agrees that protective tariffs are almost always bad.  Virtually every politician knows that protective tariffs beget even more protective tariffs in retaliation.  In fact, the World Trade Organization was created to discourage trade protectionism after the mess of the Great Depression made this painfully obvious to all.  Currency devaluations and protective tariffs are exactly the same in effect.  And yet, there are still economists of all stripes who argue that currency devaluation is a means to lifting an economy out of its depths.

Actually, they are not exactly the same in one significant aspect.  When a country devalues its currency it devalues itself.  It devalues the worth of its labor.  It devalues the strength of its reserves.  It removes incentives for savings and investments, and encourages the export of capital.  Currency devaluation creates a worse outcome even than a protective tariff.

So where does today’s spiral currency devaluation end?  If the 1920s rush to protective tariffs is any indication, the answer is:  not well.

Then, deflation was the result.  Years of forcibly escalating prices to prop up exports and subsidize domestic producers ultimately resulted in a collapse causing prices to fall to where they really should have been all along.  The price of agricultural goods was the most obvious indicator of this effect.  Advances in mechanization, refrigeration, transportation, hybridization, and chemistry resulted in a surplus of agricultural goods worldwide.  Too many people were engaged in direct and indirect agricultural work around the world as a result of the worldwide subsidy effect of protective tariffs.  When it collapsed, so too did prices.  All that the years of protective tariffs did was to take what should have been a gradual de-agriculturalization of the world’s economy and delay it long enough that it became a catastrophic global shock.  In other words:  deflation wasn’t the cause of the Great Depression; deflation was the logical effect of years of misbegotten economic policies practiced by every major economy in the world.  To blame the Depression on deflation, therefore, is as ludicrous as blaming the mercury in a thermometer for causing a heatwave.

Central bankers today fear deflation unnecessarily.  So much so that the world’s bankers are doing exactly what they know the world’s politicians did 90 years ago that led to the last Great Depression. This won’t end well.

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Fences work both ways

Byline: | Category: Culture, Economy, Ethics, Foreign Policy, Government, Regulations, Taxes & Spending | Posted at: Thursday, 22 January 2015

Because we always must heed the law of unintended consequences, Americans–particularly Republicans–probably should be more circumspect in their calls for the government to erect a border fence.

We live in a time when the American economy no longer is a beacon to the world’s entrepreneurs and when members of both parties want to implement laws inhibiting American companies from relocating overseas.

It would be a shame if a border fence, once built, wasn’t necessary to keep foreigners out, but instead became a convenient means of keeping Americans in.

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Watch the Swiss

Byline: | Category: Economy, Government, Taxes & Spending | Posted at: Thursday, 15 January 2015

Thursday the Swiss National Bank gave the world a quick lesson about why a strong currency is almost always better for an economy.

It is not uncommon for economic populists to attempt to demonstrate that a falling currency benefits an economy by helping exports and by claiming that devaluation is the “normal way countries emerge from financial crisis.”  Neglected by that line of thinking is that an economy’s imports necessarily increase in price as a result of that same currency devaluation.  But even if we analyze both sides of the equation, it would seem that the two should balance out.

However, lower import costs as a result of a stronger currency are almost always better for both consumer and producer.  Here is why this is the case:  while in a global market, only a few people’s livelihoods are dependent on exports, everyone depends on imports. Even the exporters depend on imported raw materials.  This sets up a situation where the individual costs of a bad economic policy–currency devaluation–are relatively small and diffused across the entire population, while the benefactors are fewer in number but have large visible gains.

But just how “small” are those costs?  On Wednesday a hundred Swiss francs bought about 83 Euros.  By the end of the next trading day it bought a hundred euros.  As a result, everything priced in Euros fell in real terms for the Swiss consumer:  Italian vegetables, German cars, French wine.  And as the franc increased by a similar amount against the dollar once Switzerland removed its artificial peg to the euro, the cost of oil, metals, and most commodities likewise plummeted.  It takes a lot of export losses to make up for the fact that the cost of almost everything Swiss consumers buy fell nearly 20% in a single day.

Under normal circumstances currency interventions are incremental and thus difficult to tie to precise costs.  That’s what makes them fun targets for government interventionists.  When gains are concentrated and losses are dispersed, it is the perfect scenario for central bankers and politicians to embark on policies that are decidedly not in the interest of the general welfare, but are in the specific interests of organized benefactors.  But the SNB’s surprise move demonstrated just how big the costs of currency manipulation really are when governments and central bankers conspire to devalue money.

Unfortunately, consumers don’t have well organized and vocal advocates, so you’re not likely to hear from most quarters that what happened Thursday is good news in the long run. (“In the long run” being defined as the amount of time it takes for the Swiss economy to readjust to an unsubsidized natural state).  Instead you’ll hear  plenty from groups like Swiss watchmakers, who by the way, are an anachronism tethered to a technology made obsolescent 50 years ago by quartz crystals.

And that’s the point.  The Swiss watch industry has much to lose only because the SNB’s artificial intervention in the currency market subsidized a larger existence these last four years than their business model deserved.

Just how large the subsidy had been is evident in today’s currency climb.  Effectively, Swiss citizens were paying a 20% sales tax on almost everything they bought so that Swatch could still churn out cheap watches for overseas markets.

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This is what war looks like

Byline: | Category: Culture, Economy, Ethics, Government, Taxes & Spending, Uncategorized, wine | Posted at: Friday, 5 December 2014

Mayor Michael Bloomberg promised New York City a war on smoking.  War is what they got.

eric-garner-police-brutality-ramsey-orta

 

While it didn’t do so explicitly, New York’s progressive government decided that smoking was so bad that it was worth killing over.  You may accuse me of hyperbole, but consider that when government passes and enforces any law, it has taken the decision to use the State’s coercive powers against the non-compliant.  Above is a picture of what the law’s coercive powers look like, what a war on smoking looks like.  The “war” in this picture does not look like hyperbole to me.

The law that led to Eric Garner’s death was a prohibition on the selling of loose, untaxed cigarettes.  In other words, Eric Garner was a bootlegger.

Any time that government restricts a willing buyer and a willing seller from agreeing upon a price, a black market will develop.  It is a rule as old as mankind.  During the first Progressive era, the rule was Prohibition and the black market was big.

Eighty-eight Christmases ago sixty New Yorkers lay violently ill in the hospital.  Eight already had died.  The culprit was poisoned alcohol.  But the criminal mind behind the culprit was the government itself.

During Prohibition, alcohol still could be produced.  It was needed in the manufacture of paints and solvents.  So to legally produce it, the government required it to be “denatured”.  Usually that was done with the addition of poisonous methyl alcohol.  But it was a simple chemist’s trick to turn methyl alcohol into ethyl alcohol, which could then be drunk.  By 1926, thousands of amateur chemists were performing that trick and thereby skirting Prohibition’s rules. They had to be stopped.  It was the law, after all, and the law had to be enforced.  So the federal government required the addition of toxic chemicals in industrial alcohol.  The additives included kerosene, strychnine, and formaldehyde.  All are highly poisonous if ingested.  By Prohibition’s end an estimated ten-thousand drinkers were dead.

The ten-thousand were collateral damage.  Nay, they were actively violating the law.  They weren’t just innocent bystanders, but were enemy combatants in the war on drink.  They deserved to die.  After all, they were violating the law.  And if we shrink from enforcing the law, people will cease to have respect for it.

Over the last dozen years, New York City was the central front in the second progressive era’s war on smoking.  Mayor Bloomberg was that front’s field marshal.  He raised the legal age to purchase cigarettes to 21, prohibited smoking in all restaurants, attempted to prohibit it in parks and even apartments, and both he and his successor increased taxes step by step to an absurdly high$5.85 per pack.  At that price the black market is big.  But all this was necessary, Bloomberg and Deblasio have said, because 6,000 New Yorkers die every year from the effects of smoking.

In the war on smoking Eric Garner was an enemy combatant.  And for that offense, the supporters of New York’s war on smoking determined that he deserved to die.  I trust they’re happy with the result.

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Why not barbed wire and guns?

Byline: | Category: Economy, Ethics, Foreign Policy, Government, Taxes & Spending | Posted at: Wednesday, 6 August 2014

I remember when I was a young Soldier in Germany and America stood against the idea of countries erecting walls to keep people from leaving.

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ProhibitionCare

Byline: | Category: Above the Fold, Culture, Economy, Ethics, Government, wine | Posted at: Monday, 18 November 2013

Prior to the disastrous implementation of Obamacare, has there ever been a law that fell that so far out of disfavor that the American people clamored for wholesale repeal? Yes, it was called Prohibition.

The parallels between Prohibition and Obamacare begin with the fact that both laws were the culmination of decades of “Progressive” ideals.  A century ago Progressives believed that people would be better off if they were able to control what individuals were allowed to buy and sell.  Modern Progressives are no different.  From its first attempt in Maine in the 1850s, Progressives in both parties worked tirelessly to extend anti-alcohol laws to the entire country.  This most recent bout of progressivism began sixty years ago with Democrat Harry Truman, who pushed the idea of socialized medicine.  The movement received considerable advancement from Democrat Lyndon Johnson, who created Medicare, Republican George W. Bush, who added prescription drugs coverage, and Republican Mitt Romney, who built the first Obamacare-like system in Massachusetts.

Many Progressives of an earlier era wanted Prohibition for others, but not for themselves.  The progressive United Methodist Church, which was officially dry but whose membership certainly wasn’t, said that, “Under slavery the Negroes were protected from alcohol, consequently they developed no high degree of ability to resist its evil effects.”  A Collier’s editorial elaborated on this form of racial paternalism, “White men are beginning to see that moral responsibility for the negro rests on them, and that it is a betrayal of responsibility to permit illicit sales of dangerous liquors and drugs.” These were the attitudes of “Wet-Drys,” people who themselves drank, but who didn’t want “others” to drink.  Besides racism, anti-Catholicism was rampant among earlier Progressives.  Germans, Italians, and Irish (and let us not forget anti-Catholicism’s sibling, anti-semitism), flooded America’s cities during this period–and they all drank!  Modern progressives similarly want Obamacare for thee, but not for me.  Most infamous is that Congress specifically exempted itself and its employees from the new Obamacare requirements when it passed the law.  Favored Progressive partners too–especially unions–have asked for, and gained their own Obamacare exemptions.  Hypocrisy enjoys a long pedigree among Progressives.

Electoral chicanery is another similarity.  There was a rush to enact the Eighteenth Amendment before the 1920 Census resulted in redistricting that would give more House seats to the cities and the immigrant Catholics who lived there.  Following the census, which recorded a 21% population increase largely as a result of immigration, there was so much concern that “Wets” would gain the upper hand in Congress as well as in state legislatures, that Congress was never redistricted in accordance with the Constitution.  Until 1933 when Prohibition was finally overturned, the House was stuck with the same district lines that were drawn back in 1910.  A century later, modern Progressives played similar games after Republican Scott Walker  Brown’s surprise election to the Senate from Massachusetts meant that the House bill enacting Obamacare could not be ratified.  Instead, an earlier Senate bill, that was nowhere near to ready for implementation and which had not gone through a conference committee, was accepted without modification in the House, and in defiance of the Constitutional provision that revenue bills had to originate in the House.

In 1925 H.L. Mencken observed:

“Five years of Prohibition have had, at least, this one benign effect: they have completely disposed of all the favorite arguments of the Prohibitionists. None of the great boons and usufructs that were to follow the passage of the Eighteenth Amendment has come to pass. There is not less drunkenness in the Republic, but more. There is not less crime, but more. There is not less insanity, but more. The cost of government is not smaller, but vastly greater. Respect for law has not increased, but diminished.”

More than three years after the passage of Obamacare, one could make similar observations:  there is not greater health insurance coverage but less;  there is not lower health care costs, but more; and certainly, respect for the law–even from the law’s namesake and executor–has not increased, but diminished.

There is a final similarity which I am afraid might also come to pass.  While it is popularly believed that the 18th Amendment was repealed, that was actually not exactly true.  The 21st Amendment did not return things to the way they had been.  Instead of repeal, the modfication to the Constitution gave the States special power to legislate alcohol.  Because the Amendment gives the States jurisdiction, alcohol is not afforded protection under the interstate commerce clause.  Each state can, and does, tax interstate sales, while they prevent residents from acquiring alcohol across state lines.  This, and a whole host of other state restrictions, has created a hodge podge of laws that makes life difficult for wine-makers, retailers, and consumers alike.  The only beneficiaries of such legal confusion are the descendants of Prohibition’s bootleggers who are now ensconced in legally mandated monopolies.

Similarly, when Obamacare meets its demise, it is unfortunately likely to die in such a way that the successor system will leave Americans worse off than they were before Obamacare ever became law.  I hope that on this latter prediction, I am proved wrong.

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Obamacare II: The sequel will be worse than the original

Byline: | Category: Above the Fold, Culture, Economy, Government, Taxes & Spending | Posted at: Wednesday, 13 November 2013

There are two consensus opinions that have formed about Obamacare:

1.  The website will not work this year.  Every “fix” of known flaws is going to expose (and perhaps even worsen) underlying flaws that haven’t yet been discovered because few people have gotten far enough into the website to discover them.

2.  The Obamacare law itself will need significant surgery and Democrats in particular are going to need for that surgery to have to happen very, very soon.

Not yet the consensus opinion, but soon will be, is that the second item is very much like the first:  attempts to “patch” flaws in the law, just like patching flaws in the code, will expose huge problems lurking beneath the surface.  When Nancy Pelosi said that we had to pass the 2,000+ page bill to see what was in it, what she could have said is that we’re going to have to actually implement it to really learn what is in there.  It won’t be pretty.

Now here’s some added Washington reality.  Between Thanksgiving and the New Year, nothing significant will happen in Congress.  Nothing.  Even as millions of Americans get Blue Cross pink slips, that won’t get in the way of Congressional Christmas parties and taxpayer-funded vacations to warmer climes.  Oh, sure, there will be the usual press conferences and photo ops; that never stops.  But real work–the kind that is done by armies of staffers and lobbyists who write these bills–that won’t happen.   This means that whatever can be done before or shortly after the fecal matter hits the rotary device on 1 January is going to have to be short and sweet.

Going back to the status quo ante bellum is not possible.  The plans that are dropping people by the millions no longer exist.  They can’t exist under the current law and the new laws under which they could exist, won’t be written by Congress and then implemented by the insurance companies for months.  Many months.  At this point there are only bad options and worse options.  Nothing government can do will forestall this problem.  In fact, every attempt will just make the overall problem worse and further entrench the disarray.

There is only one institution in the world, only one power, that has the ability to quickly react, and that is the free market.  Forget about Washington being able to solve the problem; they have neither the time nor the cognitive ability to diagnose the problem, much less, to fix it.  Instead all Washington should do is to default to the States.  Each of the states already has on their individual state codes, health care laws.  That’s how the bulk of the health care industry was regulated in the past–a past that was only six weeks ago.  With one exception, the Federal government should just get out of the way.  And that exception is that it should allow for cross-state portability.  That will do more than anything else to spur the market to provide health care solutions.  No minimum coverage requirements, no maternity care for 80-year old men, no 26-year old children on their parents’ plans.  Nothing.  Let people shop in any state to find the plan that fits them.  The market will quickly move in to meet most customers’ needs.  And while that won’t insure everyone, it will insure most of those who have been recently dropped or who physically can’t buy coverage now.

Will it happen?  Not a chance.  You see, there’s another Washington reality at work:  Never let a crisis go to waste.  And Democrats, as well as Republicans, adhere to that ideal.  Nothing so simple could disguise the payoffs and graft that Congress can’t wait to attach to the Omnibus package to “fix” Obamacare.  And that means that the fix will be long in coming and will only make matters worse.

Now go and have a Merry Christmas!  (Too bad it’s going to feel more like a Groundhog Day version of Halloween.)

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The end of logic

Byline: | Category: Above the Fold, Culture, Economy, Education, Ethics, Government, Taxes & Spending | Posted at: Wednesday, 13 November 2013

Washington Post columnist Richard Cohen is in a bit of trouble for making this statement in his Monday column:

People with conventional views must repress a gag reflex when considering the mayor-elect of New York — a white man married to a black woman and with two biracial children. (Should I mention that Bill de Blasio’s wife, Chirlane McCray, used to be a lesbian?) This family represents the cultural changes that have enveloped parts — but not all — of America. To cultural conservatives, this doesn’t look like their country at all.

While there is some, surprisingly, the bulk of the criticism does not come from the Right for having been portrayed as knuckle-dragging dinosaurs whose acceptance of Justice Clarence Thomas’ biracial marriage and former VP Dick Cheney’s lesbian daughter belie Cohen’s stereotype un-updated since the Archie Bunker era.

No, it’s actually the Left that has most criticized Cohen.  The Huffington Post said, “Dear Washington Post:  Please fire this man.”  Esquire put Cohen in the “Newspaper Stupid Top 40.”  Paul Farhi catalogues some of the others who voice umbrage at Cohen’s remarks, including Gawker, Slate, Salon, and MSNBC.  All this “venom-spewing” as Farhi said, from ”people who should be [Cohen's] allies.”

Sadly, this is normal for the Left.  Who could forget their outrage directed toward radio host Bill Bennett when he was asked about a statistic from the then recently-published Freakonomics that said that crime has gone down because of abortion:

BENNETT: All right, well, I mean, I just don’t know. I would not argue for the pro-life position based on this, because you don’t know. I mean, it cuts both – you know, one of the arguments in this book Freakonomics that they make is that the declining crime rate, you know, they deal with this hypothesis, that one of the reasons crime is down is that abortion is up. Well –

CALLER: Well, I don’t think that statistic is accurate.

BENNETT: Well, I don’t think it is either, I don’t think it is either, because first of all, there is just too much that you don’t know. But I do know that it’s true that if you wanted to reduce crime, you could — if that were your sole purpose, you could abort every black baby in this country, and your crime rate would go down. That would be an impossible, ridiculous, and morally reprehensible thing to do, but your crime rate would go down. So these far-out, these far-reaching, extensive extrapolations are, I think, tricky.

The Leftists at Media Matters had a field day with Bennett’s comments even when their excerpts clearly exhonerated (highlighted above) him of the thought-crime of advocating the racial infanticide that they say Bennett advocated.

Bennett was engaging in the logical device known as reductio ad absurdum, whereby an argument is reduced to an absurdity so as to demonstrate the fallacy of the premise.  It just so happens that last night I mentioned to my seventh-grade son the classic reductio ad absurdum:  A Modest Proposal, wherein Jonathan Swift argues that to eliminate the surplus population of beggars, the Irish should be allowed to sell their unweaned children to be used as stew meat.

In 1729 Swift’s reader’s quickly recognized the essay as satire.  Sadly, I don’t think that American Leftists today would be able to understand the argument.  If their umbrage toward Cohen–who clearly was not advocating discrimination against biracial and gay couples—is any indicator, were Swift to write his classic today, MSNBC would surely charge him with cannibalism.

Prior to this week I could have dismissed Leftist outrage directed at Bennett as political fanaticism akin to the fanatic football fan who, even upon seeing the slow-motion replay, yells at the referee for blowing a call that he clearly called correctly.  Heretofore, I could have accepted that Bennett’s detractors understood his argument but purposefully misconstrued it so as to appeal to Low-Information Voters who might have heard only an edited version of the exchange.  Now as a result of the outrage that the Left directs against its own Richard Cohen, it is obvious that the Left isn’t trying to appeal to Low-Information Voters, but is instead made up of a large swath of Low-Intelligence Voters.

How else could one explain Obamacare?  Many of the people who are incapable of understanding Cohen’s argument are the same ones who are logically incapable of understanding that Obamacare could not work the way the President promised.  Unless you believed, as one commenter noted, that Obamacare was powered by “unicorn farts and pixie dust,” it was always completely illogical to believe that more people could get more health coverage without some people paying higher prices or being kicked off of their existing plans.

Another Cohen, Michael Cohen (I don’t know if he is a relation), buttresses that point (hat tip: David Henderson).

But, of course, this means that some Americans would not only lose their plans and access to their doctor, but in the case of particularly healthy individuals, reform could yield higher premiums. Beyond that, reforming such a huge chunk of the U.S. economy necessarily leads to often unanticipated changes for millions of Americans.

Acknowledging that reality would have been the honest thing to do. So would asking healthier and wealthier Americans to sacrifice for the greater good of ensuring every American have health-care coverage.

But doing so would have opened Obama and his democratic allies up to the charge that Obamacare would lead to widespread dislocations — and made the path to reform that much politically harder to traverse.

Indeed, this is precisely the argument that was made by Republicans  . . . 

In other words:  Everything Republicans told you about Obamacare was true, but–and these are Michael Cohen’s words–you “can’t handle the truth.”  What he didn’t say but is clearly implied and could have appended: “And we know that you are too stupid and too illogical to figure out the truth on your own.”  Logical fallacy abounds on the Left, and this Cohen actually celebrates it.

This is where the modern Left is today: at the head of an easily manipulable cadre of useful idiots.  To be sure, the Right has its share of blind adherents as well.  To some, the words “abortion” and “homosexual” are like red herrings to a dog:  they quickly distract.  But I’m hard-pressed to find so glaring an example as Obamacare to demonstrate how easy it was to dupe millions of people who should have been smart enough to know otherwise.

For years it has been fashionable in some segments of the Right to complain that America’s public schools are engaged in indoctrination instead of education.  But the Left’s slander of Richard Cohen might point at a reality far worse.  It’s not that millions of Americans have been taught the wrong things–bad lessons can be unlearned.  Much worse is the possibility that many millions of Americans have never been taught how to critically read and to logically think.  If this is true, it does not bode well for the nation’s future.

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Why is slavery wrong?

Byline: | Category: Above the Fold, Culture, Economy, Ethics, Government, Taxes & Spending | Posted at: Tuesday, 12 November 2013

Over at the Daily Beast Jamelle Bouie accuses Sarah Palin  of rhetorical overreach by recently likening the national debt to slavery.

It just so happens that the introductory chapter of a book I’ve been working on doesn’t just employ slavery as a simile, but actually asserts that a central feature of modern government is slavery.  Undoubtedly, Mr. Bouie will take umbrage at the equivalence.  But I challenge him and you to refute the assertion on logical grounds.  I look forward to critiques and encourage discussion if you dare to proceed . . .

(more…)

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Doom it by making it go forward

Byline: | Category: Above the Fold, Economy, Regulations, Taxes & Spending | Posted at: Tuesday, 22 October 2013

Remember a couple weeks ago I said that it was purely for personal reasons that the President would not compromise by asking for a one-year budget deal in exchange for giving Republicans a one-year delay in Obamacare?  Well  the President only got a 90-day budget deal and it looks like it is his side that now needs an Obamacare delay.

If Republicans really want to destroy Obamacare, they would assure the Administration that there is no chance that Congress will obstruct the President’s signature plan.

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