What do Republicans Want?

Palos Verdes, California — Mitt Romney didn’t attend this year’s retreat of the Horowitz Freedom Center — he’s got other things on his agenda — but he was an interrupted presence in the minds of conservative politicians, journalists and business people who gathered here for the weekend in the advent of the most important presidential election since 1980. Remarks were off the record (mine better have been) but I can report one telling incident: a panel on the presidential election featuring four well-known political consultants and journalists turned into a Romney-bashing fest. The man was out of touch, he wasn’t a real conservative, he didn’t know how to campaign, he was facing inevitable defeat at the hands of Obama, and should be replaced at the convention by Christie or Daniels.

The session’s last question fell to me, and I undertook a defense of the former Massachusetts governor. Do you really want Romney to be Scott Walker? I asked, and answer came there none.

This election might be more important than 1980, but it wasn’t 1980, because the crisis was of a different order. The problem Republicans face is clear from Wisconson Gov. Scott Walker’s troubles. Walker is the most courageous Republican official in the country, the only one to assault the fortified positions occupied by government unions and take on entitlements. For his trouble he is facing a recall election that has the state’s undivided attention: a recent poll  shows that Wisconsinites care more about the Walker recall election than the presidential election by a margin of 51-37. Other polls show that Walker has a 50-50 chance of withstanding the recall vote.

Why are the voters of Wisconsin more focused on the state election than the national election? One explanation might be that not much has happened to federal taxes, while state and local taxes have been rising steadily, like the water temperature that boils the proverbial frog. The epicenter of the debt crisis is in the states, and it can’t be solved without government union givebacks of already-promised benefits. To my knowledge, large numbers of Americans never have been asked to take lower pensions or more restricted health benefits. That has provoked a degree of rage and upset unlike anything I have ever seen.  A close friend of twenty years with Wisconsin roots cut me off forever after hearing that I had made a small donation to Walker.

Scott Walker is my hero, because he’s the only Republican with the guts to start doing what has to be done. As I wrote last November, the gigantic burden of government spending accumulated by Democratic (as well as Republican) administrations is strangling the middle class.

I’ve published these numbers before, but they bear a reminder. Federal tax revenues remain about 10% below the pre-crisis peak, but state and local tax collections continue to rise. In part, that is because states and localities cannot run budget deficits, unlike the federal government, and must raise taxes to cover their expenses, even while they cut spending. State and local employment has fallen by more than half a million since August 1998, and the layoffs continue.

But a great deal of state and local spending is tied to federal entitlement programs, especially in health care. States receive block grants from the federal government and, in return, take on responsibility for funding public health care and other programs in return. Unfunded mandates push states further into fiscal trouble.

Exhibit 2: Federal vs local tax collections

Census Bureau

With income and sales depressed, state and local governments rely on property tax revenues more than ever.

Exhibit 3: Property taxes as percentage of total state and local revenues

Source: Census, Case-Schiller 20 City Index

Property tax collections have continued to rise, even while home prices have collapsed. Local property assessments lagged behind actual prices during the bubble years, but have not fallen to reflect the 40% decline in home prices.

Exhibit 4: Property tax revenues vs home prices

Source: Census Bureau

Property taxes have risen so far that a prospective homebuyer today will pay as much in real estate taxes as on mortgage interest.

Exhibit 5: Property taxes vs home mortgage interest (mortgage debt outstanding multiplied by current mortgage rate), in $US billions

Source: Census Bureau, Federal Reserve

We’ve already had an extensive discussion of the problem at this blog. With more Americans than ever dependent on the federal government (18% of all personal income now comes from transfer payments, and 50 million Americans are on food stamps), Republicans face a dilemma: If we state boldly that spending must be slashed, a lot of people will think that it means tightening their own belt. In the short run, they will be right, although in the long run, everyone will be poorer if we fail to do so. The danger is that the entitlements system will reduce too many Americans to feeling like state dependents.

It’s not 1980, when the budget had been in balance (along with the foreign account), and the world hungered for more American debt, and Americans had built up a cushion of home equity due to the home price run-up of the 1970s. Inflation was terrible, but homeowners’ equity was rising faster than inflation.

That may explain why Romney is restricting his economic discussion to generalities, and why people who are treading water with barely a nostril above the waterline don’t seem convinced. Romney’s saying the three magic words: Cut taxes across the board, roll back regulation, and keep America the world’s unchallenged military power. There’s nothing wrong with his message. But he has to traverse a minefield.

That’s why all Republicans need to stop playing games and united behind Romney and get him elected in November. I love Rick Santorum, but he has to understand that he’s not on a mission from God, and that no miracle will make him president. Santorum needs to use his rapport with the religious right (that includes people like me) to rally support for Romney and ensure a maximum turnout in November. If Santorum can accomplish this, all the effort and passion he invested into his campaign will accrue to the common good.