Until Europe Meets Again

Editorial do WSJ

The script could have been written in advance—Europe's leaders, meeting amid market turmoil about the consequences of failure, came together in Brussels Thursday night and Friday, and sure enough, went home declaring victory.

Broadly speaking, German Chancellor Angela Merkel got her way: The latest incarnation of the deal to save the euro involves mostly a promise by everyone to be a little more German about spending, deficits and debt. Most of the details remain to be worked out, but without an amended EU treaty the legal authority for any of it is a loose end.

On the plus side, there is no multitrillion-euro bailout fund (with Germany inevitably paying most of it), and no promise from the European Central Bank to monetize everyone's debt, either directly or laundered through the International Monetary Fund. ECB President Mario Draghi deserves at least some of the credit for upholding the central bank's independence.

Mrs. Merkel's demand of more fiscal discipline is also correct, but an agreement that offers the European Court of Justice as the enforcer is, well, amusing. What court will go toe to toe with Italian or French unions? When German rectitude meets Italian street politics, who do you think will win?

You will also look in vain for any provision addressing Europe's central problem—stagnant economic growth. If you believe, as most Europeans now do, that government spending equals economic growth, then "budget discipline" becomes mainly a bludgeon for enforcing the tax increases needed to chase high levels of spending. This will drive Europe into a long-term austerity trap. Europe needs major spending cuts and entitlement and pension reform. But outside Germany, political leaders are still holding out for an ECB rescue.

The Obama Administration has been especially unhelpful, running a quiet campaign for the ECB to crank up the presses to bail out the spenders and bond-holding banks. This U.S. interference undermines Mrs. Merkel and others seeking fiscal reform while encouraging those who think the ECB is the only way out.

We wish the Germans well in driving a hard bargain in return for writing a big check, but there is a better way. That would be to return to the euro as it was originally conceived: Countries share a currency but are responsible for their own fiscal policies, including the consequences of default.

This would require that France and Germany recapitalize their banks in the event of a major sovereign default. Interest-rate spreads among euro-zone countries would continue to be wider than before the crisis began, perhaps for many years, but this would be its own form of fiscal discipline. Spreads going forward would provide a kind of early-warning system, without the need for a new bureaucracy to enforce discipline.

No one in Europe seems to have the stomach for that. So we are stuck with these summit sequels and the certainty of more uncertainty. Meanwhile, Adam Smith's market discipline will grind on mercilessly to impose its own solution.

Killing Awlaki

Editorial do WSJ

In the decade before his death, Anwar al-Awlaki served as an imam at two American mosques attended by 9/11 hijackers. He corresponded regularly with Nidal Hasan before the Army major went on his murder spree at Fort Hood in November 2009. He was in touch with Umar Farouk Abdulmutallab, who nearly brought down a jetliner over Detroit the following month. His sermons were cited as an inspiration by attempted Times Square bomber Faisal Shahzad. He said that "jihad against America is binding upon myself, just as it is binding on every other able Muslim."

Now a Hellfire missile fired from an American drone somewhere over Yemen has brought Awlaki's career of incitement to an abrupt close. Lest you suppose this is a blessing for civilization, certain self-described civil libertarians would like a word with you.

The caviling over Awlaki's death began almost the moment the news was announced yesterday. "Al-Alwaki was born here, he's an American citizen, he was never tried or charged for any crimes," said Ron Paul, the Republican Presidential candidate, in New Hampshire yesterday. "To start assassinating American citizens without charges—we should think very seriously about this." In the Guardian, Michael Ratner of the Center for Constitutional Rights called Awlaki's killing "extrajudicial murder."

Then there is the view that the U.S. cannot carry out strikes against terrorists in countries that, like Yemen, are not at war with us. Last year, Awlaki's father filed a case in federal court on those grounds. Federal Judge John Bates dismissed it by noting that "there are circumstances in which the [President's] unilateral decision to kill a U.S. citizen overseas" is "judicially unreviewable."

More recently, however, the New York Times has reported that State Department legal adviser Harold Koh is making the case within the Administration that while the U.S. can target terrorists in places like Yemen, it must also "justify the act as necessary for its self-defense—meaning it should focus on individuals plotting to attack the United States."

Mr. Koh has his current job in part because he made a name for himself as a vociferous critic of Bush Administration antiterror policy, so maybe it's no surprise that he should now serve as this Administration's in-house scold. Yet the Authorization for Military Force Against Terrorists adopted by Congress a week after 9/11 (on a 420-1 vote in the House and 98-0 in the Senate) gives the President broad authority to use force against "those nations, organizations or persons he determines planned, authorized, committed or aided" the attacks "in order to prevent any future acts of international terrorism against the United States."
Dorothy Rabinowitz on liberal and libertarian outrage at the al-Awlaki killing.

Though Awlaki and other newer al Qaeda recruits didn't plan 9/11, they can lawfully be targeted under the "associated forces" doctrine well understood under the laws of war. The U.S. used that doctrine to attack the military of Vichy France in North Africa during World War II, for example, though Congress had declared war against Germany, Italy, Japan, Hungary, Bulgaria and Romania. The Obama Administration's own March 13, 2009 redefinition of who is an "enemy combatant" includes a specific reference to "associated forces that are engaged in hostilities" against the U.S. or its allies.

If Mr. Koh or his fellow-travelers want to narrow this definition, they are free to suggest that Congress do so. Otherwise, President Obama's powers to pursue al Qaeda and its affiliates wherever they may be are manifestly legal.

As for the idea that Awlaki was entitled to special consideration on account of his U.S. citizenship, the Supreme Court made its views clear in the 1942 Ex Parte Quirin case dealing with Nazi saboteurs: "Citizenship in the United States of an enemy belligerent does not relieve him from the consequences of belligerency." Samir Khan, a Saudi-born American who managed al Qaeda's media organization and was killed alongside Awlaki, described himself as "proud to be a traitor to America"; presumably, he too understood the consequences of belligerency.

Meanwhile, what used to be called the war on terror continues apace. The killing of Awlaki is the third time in recent months that the U.S. has thinned the ranks of al Qaeda leaders, following the raid on Osama bin Laden's compound in May and the drone strike on operations man Atiyah Abd al-Rahman in August.

Whether this means al Qaeda is on the verge of "strategic defeat," as Secretary of Defense Leon Panetta put it not long ago, isn't clear, particularly as the group continues to extend its reach in East Africa. But it does mean that al Qaeda has lost its most charismatic figures and will have to replenish its leadership ranks. Aggressive use of drones and other counterterrorist tools will complicate that task, while reminding potential jihadist recruits of the fate that awaits all of their leaders.

In our asymmetrical war on terror, intelligence and drones are two of our rare advantages. Mr. Obama's expansion of the drone campaign is his most significant national security accomplishment. For ridding the world of the menace that was Awlaki—even while ignoring the advice of some of its ideological friends—the Administration deserves congratulations and thanks.

The Buffett Alternative Tax

Editorial do WSJ

Washington has repeated nearly every economic policy mistake of the 1930s in recent years, so why not repeat one of the bigger blunders of the 1960s too? We refer to President Obama's proposal yesterday for a new "Buffett Rule" to raise taxes on Americans earning more than $1 million a year. This may sound familiar to readers of a certain age, because it is how the current, and much-hated, Alternative Minimum Tax was born.

Mr. Obama, meet Joe Barr. As LBJ's last Treasury Secretary—he served only 30 days—Barr became famous for his January 1969 testimony before Congress that 21 millionaires had paid no income tax in 1967. No fewer than 115 tax returns reporting income above $200,000 had also paid no income tax, and Barr predicted a "taxpayer revolt" unless something was done about it.

Washington proceeded to bend tax policy to chase those 21 millionaires, and so we got the Minimum Tax of 1969 that later became the Alternative Minimum Tax. The AMT now hits some four million taxpayers, and 27% of households that paid it in 2008 had adjusted gross income of $200,000 or less.

Because it hits taxpayers with heavy deductions, the AMT wallops in particular the upper-middle-class suburbs in high-tax states like New Jersey, Connecticut, Illinois and California. Congress keeps passing an annual reprieve to prevent the AMT from hitting another 20 million or so taxpayers, most of whom are far from millionaires.

So here we are back at the same old political stand, though even Mr. Obama concedes that today those he routinely calls "millionaires and billionaires" pay at least some tax. The President's complaint, echoing billionaire Warren Buffett, is that too many billionaires pay a lower rate than regular salary earners. So even as he endorsed tax reform in general yesterday, Mr. Obama insisted that one of his reform "principles" is that people who make more than $1 million must pay a higher tax rate than middle-class earners.

There's one small problem: The entire Buffett Rule premise is false, as the nearby table shows. In 2008, the last year for which such data are available, the IRS reports that those who made more than $1 million in adjusted gross income paid an average income tax rate of 23.3%.

That's slightly lower than the 24.1% rate paid by those making between $500,000 and $1 million, probably because the richest are like Mr. Buffett and earn more from capital gains and dividends. The rate for a relative handful of the rich—400 people—fell to 18%, the modern equivalent of Barr's Gang of 21. But nearly all millionaires still paid a rate that is more than twice the 8.9% average rate paid by those earning between $50,000 and $100,000, and more than three times the 7.2% average rate paid by those earning less than $50,000. The larger point is that the claim that CEOs are routinely paying lower tax rates than their secretaries is Omaha hokum.

If Mr. Obama really wants all of these people to pay even more in taxes, there are only two ways to do so. One is to raise tax rates on capital gains, dividends and other investment income that is taxed at 15% and represents a great deal of income for the wealthy. This is probably Mr. Buffett's tax secret, though to our knowledge he hasn't released his returns to the public.

The problem is that this is a tax increase on capital investment, which the U.S. already taxes at prohibitive rates thanks to our high corporate tax rate of 35%. Capital gains and dividends are taxed twice, first as corporate profits and then as payouts to individuals. Their real capital gains tax rate is closer to 45% than 15%, which is why politicians of both parties have long supported a capital-gains rate differential.

The other way to raise taxes on the rare Buffett is with a new Minimum Tax, a la Joe Barr. But as we've seen with the AMT, while the politicians may start by chasing "millionaires and billionaires," over time they always end up taxing the middle class because that's where the real money is. Mr. Obama could tax every billionaire in America at a 100% rate and still wouldn't make a dent in the federal deficit. He would, however, succeed in making those taxpayers invest less and search for tax shelters, assuming they didn't move offshore.

We rehearse all of this because it shows that the real point of Mr. Obama's Buffett Rule and his latest deficit proposal isn't tax justice or good tax policy. It is all about re-election politics. Down in the polls and facing a sullen liberal base, Mr. Obama wants to rally the left behind him, and nothing fires them up like the pretense that government is sticking it to the rich. Mr. Obama is picking a tax fight that he apparently believes will carry him to re-election next year.

And what about the economy? Well, the plan Mr. Obama unveiled yesterday along with his Buffett Rule would sock the economy with $1.5 trillion in new taxes over 10 years, or about 1% of GDP. This includes the tax increases built into the 2013 expiration of the Bush-era tax rates but not those of ObamaCare. Anyone who believes this will help an economy that is creating few new jobs and growing by only 1% probably also believes that only the rich would pay the Buffett Alternative Tax.

Why the Stimulus Failed

Editorial do WSJ

Even zero jobs growth in August doesn't seem to have disrupted President Obama's faith in the economic policies of his first three years, so one theme we'll be listening for in tonight's speech is how he explains the current moment. Why did his first jobs plan—the $825 billion stimulus—so quickly result in the need for another jobs plan?

For readers who want to know, an important account is offered in a pair of new Mercatus Center working papers by the George Mason economists Garett Jones and Daniel Rothschild, who did field research on what they call the supply side of the stimulus.

The Keynesian theory was that a burst of new government spending would take up some of the slack in aggregate consumer demand. This was justified in 2008, again in 2009, and is still defended now based not on real-world observation but on abstract macroeconomic models that depend on the assumptions of the authors. The Congressional Budget Office's quarterly studies—often cited to claim the stimulus created tens of thousands of new jobs—are based on such a model. By informative contrast, Messrs. Jones and Rothschild interviewed actual people who received stimulus dollars and asked how they spent the money.

In the first paper, the authors survey 85 different businesses, nonprofits and local governments across the country and conclude that "As is often the case when economic models are transferred from the blackboard to actual public policy, there was a gap between theory and practice."

One of the major patterns Messrs. Jones and Rothschild uncovered was that the top-down stimulus was poorly targeted. In one redolent example, a federal contractor said he was told to use smaller, nonstandard tiles that are harder and more expensive to install in order to increase the cost of the project. That way, the government could claim the money was moving out the door faster. The famous Milton Friedman line about government ordering people to dig with spoons to employ more people comes to mind.

In another case study, a budget shortfall forced a mid-size city to lay off 185 public workers—but the city received a $4 million stimulus grant to improve municipal energy efficiency. The manager of a construction company received funds for "the last thing on our list; and truthfully, the least useful thing." It happened to be a crane and a forklift.

The authors are careful to note that such anecdotes do not mean that all of the stimulus was a waste, and they did find some success stories. The problem is that all but the most reductionist Keynesians of the Paul Krugman school believe it matters what the government spends money on. A dollar that eventually will be taken out of the private economy through borrowing or higher taxes to fund pointlessly expensive projects—a la the tiny tiles—is not the way to nurture a recovery.

The second paper suggests that the stimulus did not "create or save" nearly as many jobs as the models indicate. On the basis of 1,300 interviews, Messrs. Jones and Rothschild estimate that merely 42.1% of the firms that received grants hired people who were unemployed. Instead, they poached workers from their competitors.

"This suggests just how hard it is for Keynesian job creation to work in a modern, expertise-based economy," they write. The stimulus "was implemented at a time when the Keynesian model had every chance of succeeding on its own terms. The high level of unemployment and the rapid deadline for spending created both the supply of workers and the demand for workers. If the job market results are so lackluster in this setting, economists should expect even weaker stimulative results during more modest recessions."

The lesson of such on-the-ground knowledge is that the stimulus was a lost opportunity. In practice it became a shotgun marriage between an economic theory justified by computer models and 40 years of liberal social priorities (clean energy, Medicaid expansions and the rest). This produced the 9.1% unemployment we now have.

The economy would have benefitted far more if the government had instead improved the incentives for people and businesses to invest, produce and grow. The President probably won't mention any of this, but it does explain why he has to give his latest speech.

Obamanonics vs. Reaganomics

By STEPHEN MOORE, WSJ

One program for recovery worked, and the other hasn't

If you really want to light the fuse of a liberal Democrat, compare Barack Obama's economic performance after 30 months in office with that of Ronald Reagan. It's not at all flattering for Mr. Obama.

The two presidents have a lot in common. Both inherited an American economy in collapse. And both applied daring, expensive remedies. Mr. Reagan passed the biggest tax cut ever, combined with an agenda of deregulation, monetary restraint and spending controls. Mr. Obama, of course, has given us a $1 trillion spending stimulus.

By the end of the summer of Reagan's third year in office, the economy was soaring. The GDP growth rate was 5% and racing toward 7%, even 8% growth. In 1983 and '84 output was growing so fast the biggest worry was that the economy would "overheat." In the summer of 2011 we have an economy limping along at barely 1% growth and by some indications headed toward a "double-dip" recession. By the end of Reagan's first term, it was Morning in America. Today there is gloomy talk of America in its twilight.

My purpose here is not more Reagan idolatry, but to point out an incontrovertible truth: One program for recovery worked, and the other hasn't.

The Reagan philosophy was to incentivize production—i.e., the "supply side" of the economy—by lowering restraints on business expansion and investment. This was done by slashing marginal income tax rates, eliminating regulatory high hurdles, and reining in inflation with a tighter monetary policy.

The Keynesians in the early 1980s assured us that the Reagan expansion would not and could not happen. Rapid growth with new jobs and falling rates of inflation (to 4% in 1983 from 13% in 1980) is an impossibility in Keynesian textbooks. If you increase demand, prices go up. If you increase supply—as Reagan did—prices go down.

The Godfather of the neo-Keynesians, Paul Samuelson, was the lead critic of the supposed follies of Reaganomics. He wrote in a 1980 Newsweek column that to slay the inflation monster would take "five to ten years of austerity," with unemployment of 8% or 9% and real output of "barely 1 or 2 percent." Reaganomics was routinely ridiculed in the media, especially in the 1982 recession. That was the year MIT economist Lester Thurow famously said, "The engines of economic growth have shut down here and across the globe, and they are likely to stay that way for years to come."

The economy would soon take flight for more than 80 consecutive months. Then the Reagan critics declared what they once thought couldn't work was actually a textbook Keynesian expansion fueled by budget deficits of $200 billion a year, or about 4%-5% of GDP.

Robert Reich, now at the University of California, Berkeley, explained that "The recession of 1981-82 was so severe that the bounce back has been vigorous." Paul Krugman wrote in 2004 that the Reagan boom was really nothing special because: "You see, rapid growth is normal when an economy is bouncing back from a deep slump."

Mr. Krugman was, for once, at least partly right. How could Reagan not look good after four years of Jimmy Carter's economic malpractice?

Fast-forward to today. Mr. Obama is running deficits of $1.3 trillion, or 8%-9% of GDP. If the Reagan deficits powered the '80s expansion, the Obama deficits—twice as large—should have the U.S. sprinting at Olympic speed.

The left has now embraced a new theory to explain why the Obama spending hasn't worked. The answer is contained in the book "This Time Is Different," by economists Carmen Reinhart and Kenneth Rogoff. Published in 2009, the book examines centuries of recessions and depressions world-wide. The authors conclude that it takes nations much longer—six years or more—to recover from financial crises and the popping of asset bubbles than from typical recessions.

In any case, what Reagan inherited was arguably a more severe financial crisis than what was dropped in Mr. Obama's lap. You don't believe it? From 1967 to 1982 stocks lost two-thirds of their value relative to inflation, according to a new report from Laffer Associates. That mass liquidation of wealth was a first-rate financial calamity. And tell me that 20% mortgage interest rates, as we saw in the 1970s, aren't indicative of a monetary-policy meltdown.

There is something that is genuinely different this time. It isn't the nature of the crisis Mr. Obama inherited, but the nature of his policy prescriptions. Reagan applied tax cuts and other policies that, yes, took the deficit to unchartered peacetime highs.

But that borrowing financed a remarkable and prolonged economic expansion and a victory against the Evil Empire in the Cold War. What exactly have Mr. Obama's deficits gotten us?

Mr. Moore is a member of the Journal's editorial board.

What Austerity?

Editorial do WSJ

Federal spending will hit a new record this year

With the recovery sputtering, the White House and its allies have been blaming government spending cuts, or what the neo-Keynesians call "fiscal contraction." This is a dubious economic theory even if spending were being cut, but yesterday's mid-year report from the Congressional Budget Office shows definitively that there's been nothing close to contraction in Washington.

That's the real news in the CBO numbers, which show that spending in fiscal 2011 (which ends on September 30) will hit a new high of $3.6 trillion, up $141 billion from 2010. That's higher than the previous record in 2009 of $3.5 trillion, which was supposed to be the peak of the "temporary" stimulus spending.

As the nearby chart shows, that is also nearly $900 billion more spending than in 2007. Total federal outlays will have increased by roughly one third in a mere four years. This hasn't happened since the Great Inflation of the late 1970s.

Give President Obama and the two Pelosi Congresses credit for this much: They said they would spend our way out of recession, and they sure gave it the old Beltway try. The problem is that we got the spending without the promised economic growth.

This is the real cause of our current deficit and debt woes. As a share of the economy, spending will once again come in at nearly 23.8%, up from 20.7% as recently as 2008. Defense spending is expected to increase by only $14 billion to $703 billion in 2011, despite the surge in Afghanistan. The bigger increases are in Medicare, Medicaid, and the usual panoply of entitlements and other payments to individuals.

All of this means the deficit will roll in at nearly $1.3 trillion, or 8.5% of GDP this year. That's down a mere $10 billion from fiscal 2010, and we suppose taxpayers should be grateful for small fiscal favors.

The reason for this small deficit dip is that total tax revenues will climb in fiscal 2011 by about $150 billion. Individual income tax receipts will increase this year by about 21%, or $190 billion, though tax rates have stayed the same. Even with this good news, revenues will still come in at only 15.3% of GDP, which is far below the modern historical average of more than 18%.

Revenues would have been about $115 billion higher without the temporary payroll tax cut pressed by President Obama. But that tax cut hasn't provided any economic lift, and overall growth simply isn't fast enough to get revenues back to normal. Merely returning to an average economic expansion would reduce the deficit by 3% of GDP a year, or hundreds of billions of dollars.

Looking forward, CBO forecasts a sunnier fiscal picture, but it is based on assumptions that will never come true. The deficit is projected to fall to $973 billion in fiscal 2012, then fall again to $510 billion in 2013, and to a mere $265 billion in 2014.

But this assumes that federal spending will grow by only $12 billion in 2012, a level of spending control that even Ronald Reagan never achieved. President Obama wants much more spending next year and so does the Senate. Oh, and Medicare payments to doctors will fall by nearly 30% starting in 2012. Congress has been promising this cut in payments since 1997, but it never happens and would hurt medical care if it did.

The rest of CBO's fantasy forecast comes from what it says will be "the sharp increases in revenues that will occur when provisions of [the Bush era tax cuts extended last year] expire." So CBO estimates that federal taxes as a share of GDP will leap to 19% in 2013 and 20.2% in 2014 from 15.3% today. And we are supposed to believe that economic growth will soar to 4.4% and 5% in 2014 and 2015 after huge tax increases on capital gains, dividends, small businesses and workers in 2013. Beam us up, Scotty.

With these optimistic assumptions, CBO is able to forecast that federal debt held by the public will rise only to a peak of 73% in 2013 before falling to 67% in 2016. We think economist David Malpass is closer to the truth when he predicts a debt to GDP ratio closer to 85% in 2016 and 100% in 2021 without significant reform.

The real story told by the CBO report is that the federal government is still pursuing a very loose fiscal policy, despite lamentations from Democrats and the Keynesian economists who populate Wall Street. The best that House Republicans have been able to do so far is to battle Mr. Obama and Senate Democrats to a draw, delaying tax increases until 2013 and preventing even larger spending increases. To really control Washington's appetites, the voters are going to have to back up their message in 2010 with reinforcements in 2012.

Keynesian Economics vs. Regular Economics

By ROBERT J. BARRO, WSJ

Keynesian economics—the go-to theory for those who like government at the controls of the economy—is in the forefront of the ongoing debate on fiscal-stimulus packages. For example, in true Keynesian spirit, Agriculture Secretary Tom Vilsack said recently that food stamps were an "economic stimulus" and that "every dollar of benefits generates $1.84 in the economy in terms of economic activity." Many observers may see how this idea—that one can magically get back more than one puts in—conflicts with what I will call "regular economics." What few know is that there is no meaningful theoretical or empirical support for the Keynesian position.

The overall prediction from regular economics is that an expansion of transfers, such as food stamps, decreases employment and, hence, gross domestic product (GDP). In regular economics, the central ideas involve incentives as the drivers of economic activity. Additional transfers to people with earnings below designated levels motivate less work effort by reducing the reward from working.

In addition, the financing of a transfer program requires more taxes—today or in the future in the case of deficit financing. These added levies likely further reduce work effort—in this instance by taxpayers expected to finance the transfer—and also lower investment because the return after taxes is diminished.

This result does not mean that food stamps and other transfers are necessarily bad ideas in the world of regular economics. But there is an acknowledged trade-off: Greater provision of social insurance and redistribution of income reduces the overall GDP pie.

Yet Keynesian economics argues that incentives and other forces in regular economics are overwhelmed, at least in recessions, by effects involving "aggregate demand." Recipients of food stamps use their transfers to consume more. Compared to this urge, the negative effects on consumption and investment by taxpayers are viewed as weaker in magnitude, particularly when the transfers are deficit-financed.

Thus, the aggregate demand for goods rises, and businesses respond by selling more goods and then by raising production and employment. The additional wage and profit income leads to further expansions of demand and, hence, to more production and employment. As per Mr. Vilsack, the administration believes that the cumulative effect is a multiplier around two.

If valid, this result would be truly miraculous. The recipients of food stamps get, say, $1 billion but they are not the only ones who benefit. Another $1 billion appears that can make the rest of society better off. Unlike the trade-off in regular economics, that extra $1 billion is the ultimate free lunch.

How can it be right? Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people? Keynes, in his "General Theory" (1936), was not so good at explaining why this worked, and subsequent generations of Keynesian economists (including my own youthful efforts) have not been more successful.

Theorizing aside, Keynesian policy conclusions, such as the wisdom of additional stimulus geared to money transfers, should come down to empirical evidence. And there is zero evidence that deficit-financed transfers raise GDP and employment—not to mention evidence for a multiplier of two.

Gathering evidence is challenging. In the data, transfers are higher than normal during recessions but mainly because of the automatic increases in welfare programs, such as food stamps and unemployment benefits. To figure out the economic effects of transfers one needs "experiments" in which the government changes transfers in an unusual way—while other factors stay the same—but these events are rare.

Ironically, the administration created one informative data point by dramatically raising unemployment insurance eligibility to 99 weeks in 2009—a much bigger expansion than in previous recessions. Interestingly, the fraction of the unemployed who are long term (more than 26 weeks) has jumped since 2009—to over 44% today, whereas the previous peak had been only 26% during the 1982-83 recession. This pattern suggests that the dramatically longer unemployment-insurance eligibility period adversely affected the labor market. All we need now to get reliable estimates are a hundred more of these experiments.

The administration found the evidence it wanted—multipliers around two—by consulting some large-scale macro-econometric models, which substitute assumptions for identification. These models were undoubtedly the source of Mr. Vilsack's claim that a dollar more of food stamps led to an extra $1.84 of GDP. This multiplier is nonsense, but one has to admire the precision in the number.

There are two ways to view Keynesian stimulus through transfer programs. It's either a divine miracle—where one gets back more than one puts in—or else it's the macroeconomic equivalent of bloodletting. Obviously, I lean toward the latter position, but I am still hoping for more empirical evidence.

Mr. Barro is an economics professor at Harvard and a senior fellow at Stanford's Hoover Institution.

How Not to Grow an Economy

Editorial do WSJ

Financial markets are in turmoil, investors are fleeing to safe havens, and the chances of another recession are rising. This would seem to be a moment when government should be especially careful to do no harm, to talk and walk softly, and to reassure business that Washington wants more private investment and hiring.

But this is not how our current government behaves. Day after day brings headlines of another legislative, regulatory or enforcement action that gives CEOs and investors reason to hunker down, retain as much cash as possible and ride out whatever storms are ahead. This is not the way to nurture an already fragile recovery, much less help the economy to endure shocks from Europe, natural disasters or a big bank failure.

Consider the headlines only from last week, a slow week by Washington standards, with Congress out of session and President Obama campaigning for three days before going on vacation. Even in the dog days of August, your government was hard at work undermining economic confidence.

• Monday: "Warren Buffett right about taxes, says Obama." The week began with a one-two tax punch from Warren Buffett and President Obama. The Omaha stock-picker wrote an op-ed begging Congress to raise taxes on millions of Americans who make less than he does, and the President used the first stop of his bus tour, in Cannon Falls, Minnesota, to agree.

"I put a deal before the Speaker of the House, John Boehner, that would have solved this problem," Mr. Obama said, "and he walked away because his belief was we can't ask anything of millionaires and billionaires and big corporations in order to close our deficit." So America's main job creators are still on notice that a tax increase is in their future in 2013, if not sooner.

• Tuesday: "Federal mortgage role to be preserved: Obama is working to develop new housing policy." A Washington Post story reported that Mr. Obama has directed a White House team to develop a housing plan that would keep the feds deeply involved in mortgage markets, with subsidies and loan guarantees, perhaps even preserving Fannie Mae and Freddie Mac.

This contradicts the Treasury's February white paper recommending a much smaller government role in housing without Fan and Fred. A Treasury official responded that the white paper is still guiding policy, but private investors who might want to get into housing finance know the Post story came from someone in authority and have another reason to stay on the sidelines.

• Thursday: "Justice Inquiry Is Said to Focus on S.&P. Ratings." Barely two weeks after Standard & Poor's downgraded U.S. debt over White House protests, we learn that the feds are going after the firm for its ratings on mortgage securities before the financial crisis. The feds say the probe was underway before the downgrade, but the credit rater's mortgage mistakes have been known for years. And why not Moody's or Fitch?

The message: If you disagree with this Administration, you'd better lawyer-up.

• Thursday: "Exxon, U.S. Government Duel Over Huge Oil Find." Exxon has made the biggest oil discoveries ever in the Gulf of Mexico at some one billion barrels, but the feds have taken the extraordinary action of denying the oil company what had long been routine oil lease extensions. So Exxon and a Norwegian firm are suing the feds to be able to drill on the leases, spending money on lawyers for permission to create jobs and increase domestic oil production.

• Thursday: "Fed Eyes European Banks: Regulators Scrutinize Ability of Institutions' U.S. Units to Fund Themselves." The Wall Street Journal quotes Federal Reserve Bank of New York officials as saying they're worried about the condition of European banks and are on the job making sure that any problems don't damage American banks. It's nice to know U.S. regulators are earning their pay, but the spectacle of regulators publicly broadcasting troubles at European banks does nothing to calm already jittery interbank markets.

• Thursday: "Obama to push stimulus plan." The President signals more government fiscal action, to be unveiled after Labor Day. Ideas on the table: New spending on roads and a tax credit for companies that hire workers.

The thinking, say aides, is to pressure Republicans to pass these proposals or look indifferent to high unemployment. So even as he proposes to reduce deficits far into the future in ways that will depend on decisions by future Congresses, the President will fight to increase spending immediately. Americans may conclude they've heard this cognitive dissonance before.

None of these stories by themselves—or even a week of them—is enough to undermine a recovery. But the cascade of such stories day after day—about new regulations, new prosecutions or fines against business, new obstacles to investment, more spending and higher taxes—contributes to the larger lack of business and consumer confidence.

It's impossible to quantify the impact of such policies on lost GDP or lost job creation, but everyone in the real economy understands how such signals work. The great tragedy of the Obama nonrecovery is that this Administration still doesn't realize the damage it is doing.

Why Americans Hate Economics

By STEPHEN MOORE, WSJ

Christina Romer, the University of California at Berkeley economics professor and President Obama's first chief economist, once relayed the old joke that "there are two kinds of students: those who hate economics and those who really hate economics." She doesn't believe that, but it's true. I'm surprised how many students tell me economics is their least favorite subject. Why? Because too often economic theories defy common sense. Alas, the policies of this administration haven't boosted the profession's reputation.

Consider what happened last week when Laura Meckler of this newspaper dared to ask White House Press Secretary Jay Carney how increasing unemployment insurance "creates jobs." She received this slap down: "I would expect a reporter from The Wall Street Journal would know this as part of the entrance exam just to get on the paper."

Mr. Carney explained that unemployment insurance "is one of the most direct ways to infuse money into the economy because people who are unemployed and obviously aren't earning a paycheck are going to spend the money that they get . . . and that creates growth and income for businesses that then lead them to making decisions about jobs—more hiring."

That's a perfect Keynesian answer, and also perfectly nonsensical. What the White House is telling us is that the more unemployed people we can pay for not working, the more people will work. Only someone with a Ph.D. in economics from an elite university would believe this.

I have two teenage sons. One worked all summer and the other sat on his duff. To stimulate the economy, the White House wants to take more money from the son who works and give it to the one who doesn't work. I can say with 100% certainty as a parent that in the Moore household this will lead to less work.

Economic bimboism is rampant in Washington. The Center for American Progress held a forum earlier this summer arguing that raising the minimum wage would create more jobs. For this to be true, you have to believe that the more it costs a business to hire a worker, the more workers companies will want to hire.

A few months ago Mr. Obama blamed high unemployment on businesses becoming "more efficient with a lot fewer workers," and he mentioned ATMs and airport kiosks. The Luddites are back raging against the machine. If Mr. Obama really wants to get to full employment, why not ban farm equipment?

Or consider the biggest whopper: Mr. Obama's thoroughly discredited $830 billion stimulus bill. We were promised $1.50 or even up to $3 of economic benefit—the mythical "multiplier"—from every dollar the government spent. There was never any acknowledgment that for the government to spend a dollar, it has to take it from the private economy that is then supposed to create jobs. The multiplier theory only works if you believe there's a fairy passing out free dollars.

How did modern economics fly off the rails? The answer is that the "invisible hand" of the free enterprise system, first explained in 1776 by Adam Smith, got tossed aside for the new "macroeconomics," a witchcraft that began to flourish in the 1930s during the rise of Keynes. Macroeconomics simply took basic laws of economics we know to be true for the firm or family—i.e., that demand curves are downward sloping; that when you tax something, you get less of it; that debts have to be repaid—and turned them on their head as national policy.

As Donald Boudreaux, professor of economics at George Mason University and author of the invaluable blog Cafe Hayek, puts it: "Macroeconomics was nothing more than a dismissal of the rules of economics." Over the years, this has led to some horrific blunders, such as the New Deal decision to pay farmers to burn crops and slaughter livestock to keep food prices high: To encourage food production, destroy it.

The grand pursuit of economics is to overcome scarcity and increase the production of goods and services. Keynesians believe that the economic problem is abundance: too much production and goods on the shelf and too few consumers. Consumers lined up for blocks to buy things in empty stores in communist Russia, but that never sparked production. In macroeconomics today, there is a fatal disregard for the heroes of the economy: the entrepreneur, the risk-taker, the one who innovates and creates the things we want to buy. "All economic problems are about removing impediments to supply, not demand," Arthur Laffer reminds us.

So here we are, three years of mostly impotent stimulus experiments and the economy still hobbled. Keynesians would be expected to be second-guessing the wisdom of their theories. Instead, Prof. Romer recently complained that the political system will not allow Mr. Obama to "go back and ask for more" stimulus.

And that is why Americans hate economics.

Mr. Moore is a member of the Journal's editorial board.

The Tea Party's Achilles' Heel

By YUVAL LEVIN AND PETER WEHNER, WSJ

The tea party movement has been a profoundly positive force in American political life. It has recast the political debate to put the country's fiscal problems front and center, helped to drive a historic midterm election, and begun to put the brakes on the Obama administration's reckless spending.

Two years ago, all the focus in Washington was on how much to spend; today it is on how much to cut. The tea party freshman in the House of Representatives, together with more senior like-minded members, prevented the Republican leadership from agreeing to deals that would have increased taxes in exchange for largely illusory cuts. As a result, the debt-ceiling deal was significantly better than it would otherwise have been. Next year, discretionary spending will be, in absolute terms, less than it was this year—a small first step, but an important one.

But the next test, and the real test, for the tea party movement is whether it can channel its energy into entitlement reform—and specifically the reform of Medicare. The reason is simple: Our debt explosion is a health-entitlement explosion. Between now and 2050, according to the Congressional Budget Office, spending on federal health programs—Medicare, Medicaid and the new ObamaCare entitlement—will grow to 13% of gross domestic product from 5.6%, while all other federal spending combined will actually decline as a share of the economy.

The crushing and unprecedented coming debt crisis—which will see the national debt grow to more than twice the size of the economy, strangling our economic future—cannot be averted unless health-care costs are brought under control, and that cannot be done unless the basic structure of the Medicare program is reformed. If we ignore Medicare, we ignore the debt problem.

Unless the tea party movement is willing to step up to the plate on this issue, its members cannot really be considered champions of limited government or defenders of America's future prosperity. There is a very real danger that members of the movement will get distracted by side issues (cutting foreign assistance, for example, which wouldn't move the needle on our long-term debt) or will cling to untenable stands (opposing in principle any increase in the debt ceiling) while avoiding the entitlement debate.

Rep. Michele Bachmann (R., Minn.), winner of the Iowa straw poll and a heroine of the tea party movement, is a perfect example of this. She claims she has a "titanium spine" when it comes to fiscal matters, portraying herself as a crusader on behalf of smaller government. But is she really?

Rep. Paul Ryan (R., Wis.), chairman of the House Budget Committee, has put forward a plan that would transform the fee-for-service structure of Medicare, which is the chief driver of inefficiency in our health-care system, into a system of defined-contribution health benefits. It is the best, most far-reaching reform of health-care entitlements on the table. Yet when asked about Mr. Ryan's Medicare plan, Mrs. Bachmann's titanium spine seems to fold.

She has said she supports the Ryan budget's discretionary cuts but puts "an asterisk" over its Medicare reform. "We have to make sure going forward with senior citizens, that we're focusing on a higher quality of life, dealing with cures for instance for senior citizens," she told one interviewer.

If Mrs. Bachmann is worried that Mr. Ryan's reforms would not address her concerns, then there are other approaches to choose from. But she has declined to offer or endorse any, expressing only vague support for a small increase in the retirement age and greater means testing—neither of which would make a real dent in Medicare's growth, since neither would reform the grossly inefficient payment system that causes costs to explode throughout the health sector. An asterisk is not enough.

Meanwhile, Mrs. Bachmann voted against not only the debt-ceiling deal engineered by Speaker John Boehner (R., Ohio) but also the House Republican Study Committee's "Cut, Cap, and Balance" bill on the grounds that they didn't cut government spending enough.

A posture of bold fiscal conservatism is simply not compatible with timid evasions on Medicare reform. The combination may be politically convenient, but it is substantively incoherent. And it's not just Mrs. Bachmann who has done this—most of the GOP presidential candidates have as well. Virtually every speech they give is laced with promises to tame our deficit and debt, to scale back the size, scope, reach and cost of government. Yet they have little to say when it comes to fixing the fundamental structure of our health entitlements. They want to will the ends but not the means to those ends. And that just won't do.

There are of course serious political dangers in tackling entitlements. But a responsible governing party needs to confront not only our easiest problems but also our most important ones. The tea party movement has been indispensable in forcing Republicans (and through them forcing Washington) to start reversing the rampant spending of the last few decades. It can now do the same with respect to the far greater spending explosion looming over the next few decades—holding politicians, including presidential candidates, to a high and principled standard when it comes to addressing our fiscal problems. It can educate voters about our entitlement crisis and demand that office holders and candidates explain what they will do to fix the problem, and especially to reform Medicare.

If the tea party movement does this, it will take its place among the great, constructive political movements in U.S. history. If it doesn't, it will be judged to have been fundamentally unserious when it came to reining in the spending Leviathan.

Mr. Levin is editor of National Affairs and a fellow at the Ethics and Public Policy Center. Mr. Wehner is a senior fellow at the center and a managing director of e21.

Doubling Down on Zero

Editorial do WSJ

The Federal Reserve has kept its short-term interest-rate target at near-zero for 32 months, and yesterday its Open Market Committee announced that it'll keep the rate there for at least another 24 months. This is what a central bank does when it wants to appear to do something to help the economy but has already fired most of its ammunition.

The announcement of a specific mid-2013 target date supplants language that near-zero rates would continue for an "extended period." The idea is to assure markets that the Fed won't tighten for a very long time. Investors who want higher returns will have to go further out on the risk curve for longer, and so perhaps this will keep long rates lower for longer. Equities—one form of risky asset—certainly reacted well yesterday.

The Fed's statement was notable in particular for its dissent by three FOMC members, all of them regional bank presidents who weren't appointed by President Obama. They would have stayed with the Fed's previous extended period language.

This suggests that the policy statement may have been a compromise, and that others on the committee would have gone further, perhaps so far as to start a third round of quantitative easing (QE3). Or perhaps Chairman Ben Bernanke, who led the Fed majority, is content with the new mid-2013 target as a holding pattern to see if the economy heads into a double-dip recession. In any case such a major dissent is rare and a welcome signal of impatience with relentless easing.

The tragedy in our view is that the Fed has limited policy options if growth does turn negative. We supported the move to near-zero amid the financial panic in December 2008, but the Fed never did take advantage of the recession's end to return to a more normal risk environment. Had it gone back to 1% or so, it would have helped savers and encouraged more bank lending. This would still have been accommodative policy by any historical standard, but now the Fed would have the option of cutting rates if there is another recession.

Meanwhile, the Fed's QE2 experiment, which began last September, ended on June 30 with little to show for it. Asset prices rose as the Fed's bond purchases pushed investors into riskier assets (stocks and commodities). But the prices of those assets have since fallen back down to what investors think they're worth.

The Fed had hoped that boosting asset prices would create "wealth effects," or an increase in spending that accompanies an increase in perceived wealth. But the Fed can't dictate which asset prices will rise, and liquidity flowed into commodities as well as stocks.

Thus any wealth effect was offset by negative "income effects" as Americans suffered a decline in real income from paying more for food and energy because of the commodity-price bubble. Economic growth has decelerated over the past year despite QE2, so we wonder what good Mr. Bernanke thinks it did. We're hard-pressed to see what good QE3 would do as well.

The larger error is to assume that monetary policy will save the economy from its current malaise. That's the latest mantra from the same economists who told us that $1 trillion in spending stimulus was the answer in 2009. Since that has failed, we are now told the economy needs a bout of extended inflation to reduce our debt burden. Harvard's Kenneth Rogoff says the Fed should allow a "sustained burst of moderate inflation, say, 4-6% for several years."

There's no doubt that inflation can erode the value of money and debt. Argentina tries this every few years. Debtors and "millionaires and billionaires" (to borrow a phrase) do fine, but the middle class pays a huge price in a debased standard of living. Once you encourage more inflation, it's also hard to stop at 4%. In today's global economy with investors already suspicious of U.S. economic management, an overt declaration of such a policy might trigger a wholesale run on the dollar.

Mr. Bernanke and his Fed majority haven't gone that far, despite doubling down on zero yesterday. But if monetary policy by itself could conjure growth, or compensate for bad fiscal and regulatory policy, we'd already be booming.

A Downgrade Awakening

Editorial do WSJ

During yesterday's market meltdown, an old friend shot us an email: "The Obama adm needs to stop trying to disarm the fire alarm and start trying to put the fire out."

Good advice that, not that President Obama followed it during his midday remarks at the White House. Instead, he poured on some lighter fluid, blaming Republicans and Standard & Poor's for S&P's credit downgrade while remonstrating that both parties nonetheless had to work together. He also repeated his familiar agenda that more spending now and higher taxes later will fire up the economy and restore America's financial standing.

The Dow promptly fell another hundred points before tumbling 5.5% on the day. It was ugly out there. The S&P downgrade was a psychological shock, a slap in the face, and markets are naturally in for a rough ride.

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But we think it's also worth stepping back from the daily turmoil to look at the larger picture. To wit, the current U.S. debt debate isn't a sign of American political "dysfunction," despite what S&P, the Chinese (see below) and various sages are saying. It's a sign that we're finally beginning to comprehend and correct the problem. The process will be messy, as democracy always is, but the brawling is a sign of progress.

Let's recall how we arrived at this crossroads. A credit mania of several years that no one wanted to end suddenly turned into a financial panic in 2008. In their anxiety, and with Republicans holding the White House but having no explanation, the voters turned to the candidate who seemed coolest under fire. Though relatively unknown, Barack Obama was at least promising "hope and change."

Upon taking office, Mr. Obama proceeded to unleash the entire liberal economic and social policy arsenal in the name of ending the panic. Whether or not these were his own convictions, the President allowed the Pelosi Congress to use that rare political opening—and 60 Senate Democrats—to pursue a 40-year wish list.

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And pursue it Democrats did. To an economy recovering from excessive private leverage, they poured on trillions in new public spending and debt. Amid a financial system suffering from a nervous breakdown, they castigated bankers for causing the panic and then added 2,000 pages of new rules. They spent nearly two years redesigning one-sixth of the economy to realize their ambitions for national health care. They unleashed regulators to rewrite the nation's energy and labor laws.

It was, to put it in market terms, one of the most audacious political bets in U.S. history. Blow out the national balance sheet on the assumption that they could cover the bet later with tax increases. But business and consumers didn't take well to the political beating, the economy didn't recover as promised, and the tea party and the 2010 elections rudely interrupted to yank the liberal credit card.

The clamor and tumult of the last year are the sound of Americans slowly figuring out what has happened to them. The country and financial markets are concluding that the policy solutions imposed on them for three years haven't worked. This is inevitably a painful awakening.

Americans are also reaching conclusions about the supposedly cool hand they elected in 2008. Maybe he isn't the leader they had hoped he would be. Voters are always reluctant to reach such a judgment because they want a President to succeed. They identify his success with the country's. This is why they give Presidents a chance to change course even after a midterm election rebuke, as they did with Bill Clinton.

But President Obama has not seemed able to adapt to this shift in his political circumstances and the public mood. He does not admit mistakes easily, if at all.

As his remarks last week and yesterday showed, his economic agenda is more of the same, only less: more jobless benefits in the name of spurring job creation; an extension of the temporary payroll tax cut that has coincided with rising unemployment. Trade bills that he could have, and should have, passed two years ago. Tax increases or no bipartisan debt bargain.

While claiming to stand for a "balanced" debt deal, he allows only tinkering around the edges of Social Security and Medicare, and he refuses even to discuss ObamaCare, which is more unpopular than on the day it passed. For millions of Americans, Mr. Obama's cool has begun to look like ideological stubbornness and political detachment.

Such public recognition is the beginning of the American system correcting its mistakes. Unlike S&P, we welcome the shouting. We'd be far more worried if the country were quiet amid its rising debt burden and accepted Washington's familiar answers, the way the Japanese have tolerated two decades of malaise.

The downgrade uproar and even the market turmoil are signs that Americans aren't about to accept economic decline gracefully. To adapt a famous phrase, a debt crisis is a terrible thing to waste.

America Gets Downgraded

Editorial do WSJ

Whatever one thinks of the credit-rating agencies—and we aren't admirers—it serves no good purpose to shoot the fiscal messengers. Friday's downgrade by Standard & Poor's of U.S. long-term debt to AA+ from AAA will be the first of many such humiliations if Washington doesn't change its economic and fiscal policies.

Investors and markets—not any single company's rating—are the ultimate judge of a nation's creditworthiness. And after their performance in fanning the credit and mortgage-security mania of the last decade, S&P, Moody's and Fitch should hardly be seen as peerless oracles.

Their views are best understood as financial opinions, like newspaper editorials, and they're only considered more important because U.S. government agencies have required purchasers of securities to use their ratings. We've fought to break that protected oligopoly, even as liberals in the Senate led by Minnesota's Al Franken have tried to preserve it. Federal bank regulators have been on Mr. Franken's side in this fight, so they can blame themselves in part for S&P's continued prominence.

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Yet is there anything that S&P said on Friday that everyone else doesn't already know? S&P essentially declared that on present trend the U.S. debt burden is unsustainable, and that the American political system seems unable to reverse that trend.

This is not news.

In that context, the Obama Administration's attempt to discredit S&P only makes the U.S. look worse—like the Europeans who also want to blame the raters for noticing the obvious. Treasury officials and chief White House economic adviser Gene Sperling denounced S&P for relying on a Congressional Budget Office scenario that overestimated the U.S. discretionary spending baseline by $300 billion through 2015 and $2 trillion through 2021.

But even adjusting for that $2 trillion would only reduce U.S. publicly held debt to 85% or so of GDP—still dangerously high. And that assumes that recently agreed upon spending caps are sustained over a decade, something which rarely happens.

We think the larger problem with S&P, Moody's and Fitch is that they make no distinction over how a nation balances its books—whether through tax increases or spending reductions. Like the International Monetary Fund, the raters care only about balance.

This takes too little account of the need for faster economic growth, which is the only real path out of a debt crisis. Britain's government has earned rater approval for its fiscal consolidation, but its increases in VAT and income tax rates are hurting its tepid recovery. Letting the credit raters dictate tax increases is the road to an austerity trap.

The real reason for White House fury at S&P is that it realizes how symbolically damaging this downgrade is to President Obama's economic record. Democrats can rail all they want about the tea party, but Republicans have controlled the House for a mere seven months. The entire GOP emphasis in those seven months—backed by the tea party—has been on reversing the historic spending damage of Mr. Obama's first two years.

The Bush Presidency and previous GOP Congresses contributed to the current problem by not insisting on domestic cuts to finance the cost of war, and by adding the prescription drug benefit without reforming Medicare. But as recently as 2008 spending was still only 20.7%, and debt held by the public was only 40.3%, of GDP.

In the name of saving the economy from panic, the White House and the Pelosi Congress then blew out the American government balance sheet. They compounded the problem of excessive private debt by adding unsustainable public debt.

They boosted federal spending to 25% of GDP in 2009, 23.8% in 2010 (as TARP repayments provided a temporary reduction in overall spending), and back nearly to 25% this fiscal year. Meanwhile, debt to GDP climbed to 53.5% in 2009, 62.2% in 2010, and is estimated to hit 72% this year—and to keep rising. These are all figures from Mr. Obama's own budget office.

Rather than change direction this year, Mr. Obama's main political focus has been to preserve those spending levels by raising taxes. His initial budget in February for fiscal 2012 proposed higher spending. He then resisted the modest spending cuts that the GOP proposed for the rest of fiscal 2011.

He responded to Paul Ryan's proposal to reform Medicare and Medicaid by calling it un-American and unworthy of debate. In the most recent budget talks, he would only consider small entitlement reforms (cuts in payments to providers) if Republicans agreed to raise taxes. He has refused even to discuss ObamaCare or serious reforms in Medicare and Social Security. Meanwhile, federal payments to individuals continue to grow as a share of all spending, as the nearby chart shows.

This is how you become the Downgrade President.

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Despite S&P's opinion, there is no chance that America will default on its debts. The real importance of the downgrade will depend on the political reaction it inspires.

If the response is denial and blaming the credit raters, then the U.S. will continue on its current road to more downgrades and eventually to Greece. What has already become a half-decade of lost growth will turn into a lost decade or more.

If the response is to escape the debt trap by the stealth route of inflation—a path now advocated by many of the same economists who promoted the failed spending stimulus of 2009—then the U.S. could spur a dollar crisis and jeopardize its reserve currency status.

The better answer—the only road back to fiscal sanity and AAA status—is to reverse the economic policies of the late Bush and Obama years. The financial crisis followed by the Keynesian and statist revival of the last four years have brought the U.S. to this downgrade and will lead to inevitable decline. The only solution is to return to the classical, pro-growth economic ideas that have revived America at other moments of crisis.

The Global Rout

Editorial do WSJ

They say there's always a silver lining. Yesterday there wasn't. Markets around the globe sold off in a chaotic day. The Dow Jones Industrial Average's hair-raising ride ended the day down 512 points. The discernible theme among the wreckage was a generalized loss of confidence in the policy-making role of governments, here and in Europe.

If we had to single out one story in yesterday's events as suggestive of the depth of the desperation it was Bank of New York Mellon's announcement that it would start charging very large corporate and institutional depositors for the privilege of simply holding their cash. When even corporate treasurers are taking their money out of short-term securities and parking it in no-interest cash, you know the big boys are discovering the same anxieties Mom and Pop have known for a year as they ran out of safe havens for their assets.

Nominally, yesterday's rout began in Europe, as it became clear that the latest bailout of its debt-strapped nations isn't working and that the turmoil may spread to Spain and Italy. There is now fear that Europe will slide into recession, which would increase the odds of a United States double-dip.

As market participants sort through the charred tea leaves, they will note that oil prices fell below $89, three-month U.S. Treasury bills are yielding next to nothing, or that even the "safe haven" Swiss government felt obliged to drop interest rates near zero to protect its economy from an overvalued franc.

These volatile details matter, but the underlying problem remains unchanged: The economies of Europe and the United States have arrived at the moment when they no longer have any conceivable hope of being able to pay for the huge public commitments they've amassed the past 40 years. This year's "debt crisis" has been building for decades. European Central Bank President Jean-Claude Trichet finished his public statement yesterday by calling on Europe, for the umpteenth time, to do "comprehensive structural reform."

Here in the U.S. we have just gone through three weeks of arduous negotiations between the President and Congressional leadership over spending, taxes and a U.S. debt ceiling above $14 trillion. The deal they struck hardly qualifies as comprehensive reform. President Obama's primary contribution, after he joined the talks, was to insist that the deal include tax increases, of all things, amid high unemployment and weak growth. A relatively more sensible deal with spending cuts alone was achieved only after House Speaker John Boehner announced he could no longer do business with the White House. Congressional Democrats and Republicans then cut a compromise.

In the wake of the debt deal, liberal economists are now complaining that the downward pressure on spending violates the Keynesian commandment to flood a faltering economy with government outlays.

We've done that. From the first months of the Obama Presidency, billions of stimulus have been injected into the economy, budgeted federal spending has grown toward 25% of GDP and the Federal Reserve has poured oceans of cash into the markets.

The Keynesians have fired all their ammo, and here we are, going south. Maybe now President Obama should consider everything he's done to revive the American economy—and do the opposite.

Tea Party Sees No Triumph In Compromise

By DOUGLAS A. BLACKMON And JENNIFER LEVITZ, WSJ

The agreement to cut deficits and raise the debt ceiling hammered together in Washington caps a remarkable two-year surge by the tea-party movement—forcing Republicans and Democrats alike to refocus on spending and, at the same time, proving the political power of the tea party.

Yet, a chorus of tea-party activists and leaders across the country denounced the agreement on Monday, saying it included little in the way of the change they actually sought.

"People are saying, 'These tea partiers, aren't they wonderful, they are changing the conversation,'" said Ellen Gilmore, a leader of the LaGrange Tea Party Patriots in Georgia. "Well, we got absolutely squat—except for the conversation."

The reaction of tea-party activists to what most political observers perceive to be their greatest victory so far underscores the paradox of the movement. By using the debt ceiling as a lever, their minority bloc in the House of Representatives pushed Republicans into a defiant no-new-taxes position and erected a bulwark to federal spending.

"There is literally nothing happening politically in this country, from city councils to the presidential election, that is not driven by tea-party talking points," said Mark Meckler, a founder and national coordinator of the Tea Party Patriots, an umbrella group which says it is affiliated with 3,500 local organizations.

However, the deal struck Sunday falls far short of many tea-party groups' stated goals of no increase in the debt ceiling, vastly larger budget cuts and passage of a balanced-budget amendment. The central question facing the loose-knit tea-party movement today, two years after it sprang into existence, is whether its organization and leadership can grow to match its ideological force.

The movement remains a rough-and-tumble coalition of groups and individuals, without a clear national leader or central organization. It has splintered repeatedly around personalities, tactics and a struggle between social and fiscal conservatives.

And some of the movement's early foot soldiers—those whose enthusiasm two years ago helped propel the movement onto the national stage—have grown disillusioned. "All the protests, the organization, the fundraising, the block-walking, has it done anything? Are we better off than we were two years ago? I say 'No,'" says Dan Blackford, who until earlier this year led a tea-party chapter in suburban Houston.

Contradictions within the movement are evident in some parts of the country where the tea party was red hot a year ago, including Texas. Activity remains strong in many parts of the state. In July in Houston, more than 300 people jammed into a stuffy meeting room in a downtown Houston hotel for a day of impassioned strategizing organized by FreedomWorks, a Washington, D.C., libertarian group that claims hundreds of thousands of registered supporters nationwide.

And in Dallas, Katrina Pierson sits on the steering committee of the sprawling Dallas Tea Party, which claims 24,000 members statewide. "There is no doubt that the movement is stronger and growing," says Ms. Pierson.

In some other parts of the state, though, there is bickering and disillusionment among onetime leaders. At the Blackfords' two-story condo, the boxes of tea party "Don't Tread on Me" flags are gone from the living room because the couple no longer believes in the movement. The Blackfords came to believe the tea party was being co-opted by other conservative groups and the mainstream Republican Party to gain power, without truly embracing the movement's focus on cutting federal spending.

Similarly in the state's panhandle section, Tony Corsaut, a 50-year-old small-business owner and father of four, stepped down from the Wichita Falls Tea Party that he founded in 2009. The movement was losing focus, he says, by straying into issues such as opposition to abortion and gay marriage.

Many Texas activists are divided over who to support for the seat of Republican U.S. Senator Kay Bailey Hutchison, who is retiring. FreedomWorks and some local groups have endorsed Ted Cruz, a fiscal conservative and a former state solicitor general. Other activists are irritated that a national group has jumped into the Texas fray and is pushing for State Sen. Dan Patrick, an anti-abortion campaigner and founder of a tea-party caucus in the state legislature.

The divided picture is similar across the U.S. While tea-party groups have had success in running candidates for local offices and Republican party positions in some areas, activism has faded dramatically in other hotbeds of 2010.

It's particularly true in states like Delaware, Alaska and Nevada where high-profile tea-party candidates for the U.S. Senate flamed out in the 2010 elections. "Delaware and Alaska are still in disarray; it's almost a dead zone for us," said Shelby Blakely, a spokeswoman for the Tea Party Patriots, which focuses on lower taxes and spending and eschews social issues such as abortion.

Polling suggests that support for the tea party among U.S. voters has slipped. In the most recent national survey conducted by The Wall Street Journal and NBC News in July, the share of Americans calling themselves supporters of the movement declined to 25%, from 30% around last fall's election.

Leaders of various tea-party national groups have begun sniping at each other. In a recent interview, Mr. Meckler of Tea Party Patriots said Tea Party Express, a political action committee that raised millions of dollars for conservative candidates in 2010, was "formed to make money off the tea party" and "is an organization that is preying on the tea-party movement." He calls Tea Party Nation, a social-networking site, a "fringe group."

In separate interviews, the leaders of those groups fired back. Sal Russo, one of the founders of Tea Party Express, says Tea Party Patriots can't be believed: "They speak with forked tongue."

Far from the spirited rallies that drew tens of thousands to state capitols and Washington in 2009 and 2010, many tea-party events in recent months, from South Carolina to Denver, have been lackluster affairs. A "Freedom Jamboree" planned for this fall by a tea-party leader in Georgia and once expected to attract thousands of activists was canceled in July for lack of interest.

On his website, organizer William Temple lashed out at other groups for failing to support the effort. "If anyone in our movement has a plan or direction that can unite the movement again…please take the reins!" Mr. Temple wrote in mid-July.

In Texas, the Blackfords joined the movement in April 2009 partly because they were angry with both Democrats and Republicans for the bailouts for auto companies and financial institutions. "Where was my bailout?" said Mr. Blackford. "No one said, 'Hey, Dan, look, I know you're carrying $10,000 in credit-card debt. I'll pay that.'"

Soon they were organizing bus rides to rallies at the Texas state capitol and delivering patriotic decorations and U.S. Constitution-themed coloring books to tea-party events. "It was really simple: Rein in spending, less government control and just good fiscal practices," says Mr. Blackford.

By that fall, he and his wife were running the San Jacinto Tea Party, which had 1,000 members on its email list and drew more than 100 people to regular meetings.

In last November's elections, the San Jacinto Tea Party failed to unseat two Texas U.S. representatives, both Democrats. Still, the Blackfords' group was elated at what had happened nationally. The tea-party movement had powered a Republican takeover of the U.S. House of Representatives in spite of suffering high-profile losses in some states.

The Blackfords' frustration began in part after Texas Republicans formed a tea-party caucus in the state legislature. Instead of zeroing in on budget issues, the caucus chairman, Republican Sen. Patrick, kicked off the session by successfully pushing a bill requiring women to undergo a sonogram before getting an abortion.

A vocal contingent within the Tea Party Patriots network wanted to tackle social issues from gays in the military to gay marriage. "The social issues were very divisive," says Mr. Blackford.

Attendance fell off at San Jacinto Tea Party meetings. The Blackfords asked if anyone wanted to take over as leaders. No one stepped up, recalls Byron Schirmbeck, an active member. "It was like the steam had gone out," he says.

The Blackfords decided to look for another way to be politically active. In April, the couple stepped down from the group, legally disbanded it, and hauled 15 boxes of tea-party paraphernalia to a storage unit.

The debt agreement this week left Mr. Blackford more disillusioned than ever with the movement. He said the terms of the deal prove that many Republicans have courted the movement and "ridden the tea-party wave" without truly adopting its values.

Despite their disappointment, though, there's little evidence that tea-party leaders or activists are looking to become a more centralized force—partly out of fear that the movement could be more easily co-opted by the Washington establishment they despise. Many say the movement's decentralized structure, while sometimes messy, is deliberate and part of its strength.

Major tea-party groups stuck to their guns Monday, denouncing the debt-ceiling deal and calling for their allies in Congress to vote against it. When the house voted to approve the bill, nearly half of the 60 tea-party caucus members, including its leader, Minnesota Rep. Michele Bachmann, voted against the agreement.

Activists and national tea-party leaders said Monday they would use the heartburn over the debt deal to galvanize the movement for the 2012 vote. "We've altered this debate," said Matt Kibbe, president of FreedomWorks.

Jenny Beth Martin, another founder of Tea Party Patriots, said the movement never believed it could fulfill all its goals after just one major election victory. "We had no delusions of grandeur that…we were going to go into Congress and everything was going to change," Ms. Martin said, adding: "You're going to see much more radical results in the 2012 election."

Tea-party groups said it's inevitable that some activists get worn out—especially after a hard-fought victory like the 2010 election. A case in point: Tea Party Patriots says other tea-party groups in Houston have launched since the one led by the Blackfords dissolved.

Some tea-party supporters say the rancor generated by the debt-ceiling clash is in fact providing them with a shot of new energy. "I was looking for something to get the tea party active," said Mr. Temple, the Georgia activist. "I've already got all sorts of tea-party people emailing me saying, 'Let's get on the buses.'"

A Tea Party Triumph

Editorial do WSJ

If a good political compromise is one that has something for everyone to hate, then last night's bipartisan debt-ceiling deal is a triumph. The bargain is nonetheless better than what seemed achievable in recent days, especially given the revolt of some GOP conservatives that gave the White House and Democrats more political leverage.

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The big picture is that the deal is a victory for the cause of smaller government, arguably the biggest since welfare reform in 1996. Most bipartisan budget deals trade tax increases that are immediate for spending cuts that turn out to be fictional. This one includes no immediate tax increases, despite President Obama's demand as recently as last Monday. The immediate spending cuts are real, if smaller than we'd prefer, and the longer-term cuts could be real if Republicans hold Congress and continue to enforce the deal's spending caps.

The framework (we haven't seen all the details) calls for an initial step of some $900 billion in domestic discretionary cuts over 10 years from the Congressional Budget Office (CBO) baseline puffed up by recent spending. If the cuts hold, this would go some way to erasing the fiscal damage from the Obama-Nancy Pelosi stimulus. This is no small achievement considering that Republicans control neither the Senate nor the White House, and it underscores how much the GOP victory in November has reshaped the U.S. fiscal debate.

No wonder liberals are howling. They have come to believe in the upward spending ratchet, under which all spending increases are permanent. Not any more.

The second phase of the deal is less clear cut, though it also could turn out to shrink Leviathan. Party leaders in both houses of Congress will each appoint three Members to a special committee that will recommend another round of deficit reduction of between $1.2 trillion and $1.5 trillion, also over 10 years. Their mandate is broad, and we're told very little is off the table, but at least seven of the 12 Members would have to agree on a package to force an up-or-down vote in Congress.

If the committee can't agree on enough deficit reduction, then automatic spending cuts would ensue to make up the difference to reach the $1.2 trillion minimum deficit-reduction target. One key point is that the committee's failure to agree would not automatically "trigger" (in Beltway parlance) revenue increases, as the White House was insisting on as recently as this weekend. That would have guaranteed that Democrats would never agree to enough cuts, and Republicans were right to resist.

Instead the automatic cuts would be divided equally between defense and nondefense. So, for example, if the committee agrees to deficit reduction of only $600 billion, then another $300 billion would be cut automatically from defense and domestic accounts (excluding Medicare beneficiaries) to reach at least $1.2 trillion.

This trigger is intended to be an incentive for committee Members of both parties to agree on more cuts, but defense cuts of this magnitude would do far more harm to national security than they would to domestic accounts that have been fattened by stimulus. This is the worst part of the deal, and Mr. Obama's political goal will be to press Republicans to choose between tax increases and destructive defense cuts. The GOP will have to fight back and make the choice between domestic cuts and harm to our troops fighting multiple wars.

While the "trigger" includes no revenue increases, the committee itself could agree to raise taxes to meet the $1.2 trillion deficit reduction target. This means GOP leaders Mitch McConnell and John Boehner have to be especially careful in their choice of appointees. No one from the Senate Gang of Six, who proposed tax increases, need apply. The GOP choices should start with Arizona Senator Jon Kyl and House Budget Chairman Paul Ryan, adding four others who will follow their lead.

One reason to think tax increases are unlikely, however, is that the 12-Member committee will operate from CBO's baseline that assumes that the Bush tax rates expire in 2013. CBO assumes that taxes will rise by $3.5 trillion over the next decade, including huge increases for middle-class earners. Since any elimination of those tax increases would increase the deficit under CBO's math, the strong incentive for the Members will be to avoid the tax issue. This increases the political incentive for deficit reduction to come from spending cuts.

Mr. Obama's biggest gain in the deal is that he gets his highest priority of not having to repeat this debt-limit fight again before the 2012 election. The deal stipulates that the debt ceiling will rise automatically by $900 billion this year, and at least $1.2 trillion next year, unless two-thirds of Congress disapproves it. Congress will not do so.

Given how much the current debate has damaged the public perception of Mr. Obama's leadership, this will be a relief at the White House. This is part of the negotiating price that Mr. Boehner had to pay because of the back-bench revolt that showed he couldn't guarantee a debt-limit increase with only GOP votes. This gave Democrats more leverage.

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The same supposedly conservative Republicans and their talk radio minders may denounce this deal as a sellout, but we'll be charitable and assume they've climbed so far out on the political ledge they don't know how to climb back without admitting they were wrong. They're right that this deal doesn't "solve" our fiscal crisis, but no such deal is possible as long as liberals run the Senate and White House.

The debt ceiling is a political hostage the GOP could never afford to shoot, and this deal is about the best Republicans could have hoped for given that the limit had to be raised. The Jim DeMint-Michele Bachmann-Sean Hannity alternative of refusing to raise the debt limit without a balanced-budget amendment and betting that Mr. Obama would get all the blame vanishes upon contact with any thought. Sooner or later the GOP had to give up the hostage.

The tea partiers pride themselves on adhering to the Constitution, which was intended to make political change difficult. Yet in this deal they've forced both parties to make the biggest spending cuts in 15 years, with more cuts likely next year. The U.S. is engaged in an epic debate over the size and scope of government that will play out over several years, and the most important battle comes in the election of 2012.

Tea partiers will do more for their cause by applauding this victory and working toward the next, rather than diminishing what they've accomplished because it didn't solve every fiscal problem in one impossible swoop.

The Obama Recovery

Editorial do WSJ

Americans already know that economic growth is flagging, but Friday's second quarter GDP report confirms it: The current recovery, already one of the weakest on record, nearly stalled in the first half of 2011.

The economy expanded by a wan 1.3% in the quarter, following a revised 0.4% in the first quarter, and another downward revision in last year's final quarter to 2.3%. This means that for nine months the economy has averaged growth of less than 1.5%, which is barely treading water. At this growth rate a single major shock—such as a European meltdown, or a Chinese slowdown—could tip the U.S. back into recession.

What meager growth there was came from exports, federal spending and business investment. Inventories grew slowly and businesses are flush with cash, so there's hope for a bounce off the mat in the second half. But when you add this report to the jobless rate of 9.2%, the flat to falling housing market, layoffs at firms like Cisco and Merck, and capital flowing out of the U.S., it all adds up to a growth recession.

The GDP revisions—done every year by the federal Bureau of Economic Analysis—also show that the recession was deeper than first thought. Output fell 8.9% in the fourth quarter of 2008, and 6.7% in the first quarter of 2009. This means the Obama Administration had to climb out of a deeper hole, but paradoxically it also means that the recovery should be far more rapid.

The historical pattern is that the deeper the recession, the more robust the recovery. This is precisely what happened after the deep 1982 recession, as the nearby table shows. Growth was 4.5% in 1983, 7.2% in 1984, and it averaged nearly 4% for the five years after that through 1989. That is what a healthy recovery is supposed to look like, which is in marked contrast to the anemic eight quarters of this recovery.

This tale of two recoveries is an object lesson in economic policy. Taking office in 2009, President Obama embarked on one of the greatest reflation bets in history. He deployed the entire arsenal of neo-Keynesian policies to lift domestic demand, much as former White House economist Larry Summers still instructs at Harvard and most of the media still recommend.

So Congress deployed nearly a $1 trillion in stimulus, plus a battalion of temporary and targeted programs: cash for clunkers, cash for caulkers, tax credits for home buyers, 99 weeks of jobless benefits, "clean energy" grants, subsidies to states, and so much more. We were told that every $1 of this spending would conjure $1.50 in new economic output. The Federal Reserve has also more than cooperated by keeping interest rates near-zero for 31 months.

The bet was that with all this stimulus the economy would rebound as it did in the 1980s. Most of Washington and Wall Street believed that Mr. Obama was set up beautifully to inherit a normal recovery, claim victory for his policies, and ride easily to re-election. The problem is that the policies haven't worked. We are left with slow growth, high unemployment and $4 trillion in new debt.

The architects of this Keynesian debacle now offer the ex-post explanation that recoveries that follow financial panics are always slower. And there is no doubt that the financial meltdown has required banks, businesses and consumers to shore up their balance sheets and pay down debt.

But this is all the more reason to have pursued policies that nurture business and consumer confidence, rather than frighten them into taking fewer risks. An economy recovering from financial duress needs incentives to invest again, not threats of higher taxes. It needs encouragement to rebuild animal spirits, not rants against "millionaires and billionaires" and banker baiting. It needs careful monetary management, not endless easing that leads to commodity bubbles and $4 gasoline.

Such an economy also needs consistent and restrained government policy, not the frenetic rewriting of the entire health-care (ObamaCare), financial (Dodd-Frank), and energy (29 major EPA rule-makings) industries.

Perhaps the best proof of this policy failure is the response of the neo-Keynesians to the current malaise. They want more of the same, only less. Mr. Summers proposes a one-year extension of the payroll tax cut that has coincided with this year's growth decline. In a statement Friday, chief White House economist Austan Goolsbee also invoked the payroll tax cut, plus more jobless payments, free trade agreements (good, but why has it taken three years?), and a new "infrastructure bank." Wasn't the stimulus supposed to finance "shovel ready" infrastructure?

The message is that these folks are intellectually tapped out. They can't explain their current failure any more than they could the stagflation of the 1970s.

The only way out of this mess is to return to the growth policies that nurtured the boom of the 1980s. The circumstances aren't the same, so some of the policy choices will have to be different. But the principles are the same: Encourage businesses to expand, rather than government; let markets allocate capital, rather than politicians; liberate entrepreneurs by reining in the regulatory state.

The Obama malaise wasn't inevitable and needn't continue. It will end when our political class admits that its nostrums have failed and it is time to once again free the creative energies of the American people.

The Road to a Downgrade

Editorial do WSJ

Even without a debt default, it looks increasingly possible that the world's credit rating agencies will soon downgrade U.S. debt from the AAA standing it has enjoyed for decades.

A downgrade isn't catastrophic because global financial markets decide the creditworthiness of U.S. securities, not Moody's and Standard & Poor's. The good news is that investors still regard Treasury bonds, which carry the full faith and credit of the U.S. government, as a near zero-risk investment. But a downgrade will raise the cost of credit, especially for states and institutions whose debt is pegged to Treasurys. Above all a downgrade is a symbol of fiscal mismanagement and an omen of worse to come if we continue the same habits.

President Obama will deserve much of the blame for the spending blowout of his first two years (see the nearby chart). But the origins of this downgrade go back decades, and so this is a good time to review the policies that brought us to this sad chapter and $14.3 trillion of debt.

FDR began the entitlement era with the New Deal and Social Security, but for decades it remained relatively limited. Spending fell dramatically after the end of World War II and the U.S. debt burden fell rapidly from 100% of GDP. That changed in the mid-1960s with LBJ's Great Society and the dawn of the health-care state. Medicare and Medicaid were launched in 1965 with fairy tale estimates of future costs.

Medicare, the program for the elderly, was supposed to cost $12 billion by 1990 but instead spent $110 billion. The costs of Medicaid, the program for the poor, have exploded as politicians like California Democrat Henry Waxman expanded eligibility and coverage. In inflation-adjusted dollars, Medicaid cost $4 billion in 1966, $41 billion in 1986 and $243 billion last year. Rather than bending the cost curve down, the government as third-party payer led to a medical price spiral.

LBJ launched other welfare programs—public housing, food stamps and many more—that have also grown over time. Last year, the panoply of welfare programs spent about $20,000 for every man, woman and child in poverty, according to Robert Rector of the Heritage Foundation.

Social Security's fiscal trouble began in earnest in 1972 with bills that increased benefits immediately by 20%, added an annual cost of living adjustment, and created a benefit escalator requiring payments to rise with wages, not inflation. This and other tweaks by Democrat Wilbur Mills added trillions of dollars to the program's unfunded liabilities. Believe it or not, these 1972 amendments were added to a debt-ceiling bill.

None of these benefit expansions were subject to annual budget review and thus they grew by automatic pilot. They are sometimes called "mandatory spending" because Congress is required by law to make payments to those who meet eligibility standards, regardless of other spending needs or tax revenues.

According to the most recent government data, today some 50.5 million Americans are on Medicaid, 46.5 million are on Medicare, 52 million on Social Security, five million on SSI, 7.5 million on unemployment insurance, and 44.6 million on food stamps and other nutrition programs. Some 24 million get the earned-income tax credit, a cash income supplement.

By 2010 such payments to individuals were 66% of the federal budget, up from 28% in 1965. (See the second chart.) We now spend $2.1 trillion a year on these redistribution programs, and the 75 million baby boomers are only starting to retire.

We suspect that in the 1960s as now—with ObamaCare—liberals knew they had created fiscal time-bombs. They simply assumed that taxes would keep rising to pay for it all, as they have in Europe.

On Monday night Mr. Obama blamed President George W. Bush's "two wars" for the debt buildup. But national defense spending was 7.4% of GDP and 42.8% of outlays in 1965, and only 4.8% of GDP and 20.1% of federal outlays in 2010. Defense has not caused the debt crisis.

Many on the left still blame Ronald Reagan, but the debt increase in the 1980s financed a robust economic expansion and victory in the Cold War. Debt held by the public at the end of the Reagan years was much lower as a share of GDP (41% in 1988 and still only 40.3% in 2008) compared to the estimated 72% in fiscal 2011. That Cold War victory made possible the peace dividend that allowed Bill Clinton to balance the budget in the 1990s by cutting defense spending to 3% of GDP from nearly 6% in 1988.

Mr. Bush and Republicans did prove after 9/11 that the Washington urge to spend and borrow is bipartisan. Republicans launched a Medicare drug benefit, record outlays on education, the most expensive transportation bill in history, and home ownership aid that contributed to the housing bubble. The GOP's blunder was refusing to cut domestic spending to finance the war on terrorism. Guns and butter blowouts never last.

Then came Mr. Obama, arguably the most spendthrift president in history. He inherited a recession and responded by blowing up the U.S. balance sheet. Spending as a share of GDP in the last three years is higher than at any time since 1946. In three years the debt has increased by more than $4 trillion thanks to stimulus, cash for clunkers, mortgage modification programs, 99 weeks of jobless benefits, record expansions in Medicaid, and more.

The forecast is for $8 trillion to $10 trillion more in red ink through 2021. Mr. Obama hinted in a press conference earlier this month that if it weren't for Republicans, he'd want another stimulus. Scary thought: None of this includes the ObamaCare entitlement that will place 30 million more Americans on government health rolls.

This is the road to fiscal perdition. The looming debt downgrade only confirms what everyone knows: Congress has made so many promises to so many Americans that there is no conceivable way those promises can be kept. Tax rates might have to rise to 60%, 70%, even 80% to raise the revenues to finance these promises, but that would be economically ruinous.

Yet Mr. Obama and most Democrats still oppose any serious reform of Medicare, Medicaid and Social Security. This insistence on no reform reinforces the notion that our entitlement state is too big to afford but also too big to change politically. This is how a AAA country becomes AA, the first step on the march to Greece.