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Archive for the ‘Government Spending’ Category

I generally focus on the profligate habits and abusive tactics of the federal government in Washington, but that doesn’t mean other levels of government are well behaved.

In a column for the Washington Post, Catherine Rampell outlines some of the reprehensible ways that state and local governments extract money from the citizenry.

Think of recent, infuriating stories on civil asset forfeiture, in which law enforcement seizes cash and other property from people who are never charged with crimes. Often the departments that do the seizing get to keep the proceeds, which leads to terrible incentives. …Onerous traffic fees and court fines — which have been blamed for long-simmering tensions in places like Ferguson, Mo. — often have a similarly mercenary motive.

She’s right to be infuriated.

Policies like asset forfeiture are disgusting ways of stealing money, particularly from the less fortunate. Indeed, it’s worth noting that the two first leaders of the Justice Department’s asset forfeiture office now say the practice should be ended because of rampant abuses.

But other revenue-raising policies also are objectionable.

…states and cities are also increasingly trying to monetize other behaviors seen as sinful or wayward, like marijuana use, strip club patronage, and gambling. Hence the explosion of state-sponsored lotteries, which prey on (mostly poor) people’s mathematical illiteracy… States have also been jockeying to expand casinos and other venues for legalized gambling, which voters seem to see as generating free money. …Then there are the expensive occupational licensure requirements for jobs that don’t seem to require state-level gatekeeping, like hair-braiding.

At this point, after reading various examples of greedy governments pillaging citizens, you may be thinking Ms. Rampell is a good libertarian.

Unfortunately, that doesn’t seem to be the case.

Her anger is misdirected. Instead of holding politicians accountable, she blames voters for their unwillingness to acquiesce to tax hikes as a way of dealing with “widespread budget crunches.”

If the political toxicity of spending and tax hikes encourages obfuscation at the federal level, it has led to far more destructive and distortionary policies at the state and local levels. Voters hate taxes and will punish any politician who threatens to raise them (or, in many cases, does not accede to cutting them). But schools, roads, police forces, garbage collection, firefighters, jails and pensions still cost money, even when you cut them back as much as voters will tolerate. So instead of raising taxes, state and municipal governments have resorted to nickel-and-diming constituents through other kinds of piecemeal, non-tax revenue raisers, an outcome that is less transparent, and likely to worsen the economy, inequality and social injustice. …It’s time to take off the fiscal blinkers and start rewarding politicians who have the courage to advocate raising revenues the old-fashioned way: through taxes.

Reward a politician for raising taxes? Isn’t that like rewarding a mosquito for taking your blood?

But I shouldn’t be snarky. After all, maybe Ms. Rampell is right and that budgets for state and local governments have been cut as much as possible.

That being said, I noticed she didn’t include any figures on the trends in spending by state and local governments.

So I went to the Office of Management and Budget’s historical tables, specifically Table 15-2 which includes state and local government expenditures. And after adjusting the data for inflation, based on the composite deflator in Table 1-3, I put together a graph to determine whether there was a “budget crunch” for state and local government.

Um…not so much.

As you can see, state and local government spending has jumped dramatically, even when looking at inflation-adjusted dollars.

Indeed, the 164 percent increase in outlays since 1980 is four times greater than the 40 percent increase in the nation’s population over the same period.

In other words, the only “budget crunch” is the one being imposed on long-suffering taxpayers by state and local politicians.

Those officials are the folks who deserve Ms. Rampell’s ire.

P.S. Since this column corrects a big oversight in a Washington Post column, I suppose this would be a good time to point out other mistakes or misstatements I’ve noticed in that newspaper.

Such as the time it asserted in a news report that Germany is “fiscally conservative.”

Or the time the newspaper claimed a 0.158 percent cut would “slash” the federal budget.

And how about the time the Post said the tiny sequester would impose a “sledgehammer of budget cuts.”

P.P.S. On the other hand, the Washington Post has produced genuinely good editorials on school choice and postal service privatization, so it isn’t all bad.

P.P.P.S. And it presumably is better than the New York Times, which has a bigger list of preposterous stories (and I’m not even counting Paul Krugman’s mistakes, some of which can be seen here, here, here, here, here, here, here, and here).

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Since I’ve accused the Congressional Budget Office of “witch doctor economics and gypsy forecasting,” it’s obvious I’m not a big fan of the organization’s approach to fiscal analysis.

I’ve even argued that Republicans shouldn’t cite CBO when the bureaucrats reach correct conclusions on policy (at least when such findings are based on bad Keynesian methodology).

So nobody should be surprised that I think the incoming Republican majority should install new leadership at CBO (and the Joint Committee on Taxation as well).

So why, then, are some advocates of smaller government – such as Greg Mankiw, Keith Hennessey, Alan Viard, and Michael Strain – arguing that Republicans should keep the current Director, Doug Elmendorf, who was appointed by the Democrats back in 2009?

Before answering that question, let’s look at some of what was written today for the Washington Post’s Wonkblog.

After a series of highly-regarded conservatives voiced their support for Doug Elmendorf, the director of the Congressional Budget Office whose term is up in January, Elmendorf haters fired back on Friday, urging Republicans to jettison the Democratic appointee as soon as possible. …This argument is advanced most forcefully in an open letter to GOP congressional leaders by Grover Norquist of Americans for Tax Reform, who…is most famous as the author of the anti-tax pledge that binds virtually every Republican in Congress never to vote to raise taxes. So why is Norquist against Elmendorf? For one thing, because CBO, under Elmendorf, has not demonized higher taxes. Instead, the agency promotes a “Failed Keynesian Economic Analysis,” Norquist says, that asserts that “higher taxes are good for the economy, even to the point of implying that growth is maximized when tax rates are 100 percent.”

And where did Grover get the idea that CBO believes that ever-higher taxes lead to more growth?

Umm…well, from something I wrote.

As evidence, Norquist points to a 2010 post by the Cato Institute’s Dan Mitchell, titled “Congressional Budget Office Says We Can Maximize Long-Run Economic Output with 100 Percent Tax Rates.” “I hope the title of this post is an exaggeration,” Mitchell writes, “but it’s certainly a logical conclusion based on” CBO’s claim that paying down the national debt — regardless of whether it’s through higher taxes or lower government spending — would be a good thing for the economy. “There’s nothing necessarily wrong with CBO’s concern about deficits,” Mitchell goes on. But “what’s missing from CBO’s analysis is any recognition or understanding that the real problem is excessive government spending.” In other words, what’s missing is conservative ideology about fiscal policy.

I have two reactions, one minor and one major.

My minor point is that the author of the piece is supposed to be a neutral, even-handed reporter, yet she refers to opponents of Elmendorf as “haters” and she implies that we’re simply upset because CBO’s analysis is missing “conservative ideology about fiscal policy.”  Given that she was writing for Wonkblog, which is more akin to an editorial page, there’s nothing wrong with being opinionated. But ask yourself whether someone with such hostility can be impartial when doing straight news stories.

My major point is about policy. Why is my concern about the size of government characterized as “ideology” while we’re supposed to believe CBO’s analysis is “scrupulously impartial” even though it produced analysis which implies you maximize growth with 100 percent tax rates?!?

If my views are blind ideology, then why is there research showing the economic damage of excessive government from international bureaucracies such as the World Bank and European Central Bank? And why are there studies about the harmful economic impact of government spending from the International Monetary Fund and the Organization for Economic Cooperation and Development? Nobody has ever accused these institutions of being hotbeds of libertarian thought.

But perhaps I’m not being fair to CBO. Did the bureaucrats really imply, as part of their analysis on what would happen to the economy if the Bush tax cuts were allowed to expire, that you maximize growth with 100 percent tax rates?

You can read my original post, which holds up very well four years later. And here’s some of what I wrote yesterday to someone who asked me to justify my views on the issue.

…let’s focus on the “subsequent years,” when CBO projectst that GDP would be lower with extended tax cuts. …I’m happy to be corrected, but my reading is that CBO was stating that fiscal balance is the tail that wags the economic dog. The extended tax cuts cause larger deficits, and CBO says that these larger deficits will divert national saving from productive investment and lead to lower output. But if the tax burden is higher, as in the baseline forecast, then deficits are lower and more saving is available for productive investment and output is higher. As far as I’m aware, CBO didn’t have any limiting language back then to suggest that higher tax rates led to growth, but only up to X point. So I think I was on solid ground in asserting the CBO’s analysis implied that ever-higher tax rates led to ever-higher growth.

Seems reasonable. Moreover, I strongly suspect the Wonkblog reporter would have found several people to condemn me had I over-stated the implications of CBO’s analysis.

Now let’s return to the issue of whether Mr. Elmendorf should be re-appointed. Which fiscal conservatives are correct, the ones who want to keep him or the ones who want him replaced?

I’m in the latter category, as explained here, but Elmendorf’s defenders make plenty of good points.

The bottom line is that he is a nice guy (based on my limited interactions), a thoughtful economist, and he has been a big improvement over his predecessor. Indeed, he’s almost certainly the best CBO Director ever appointed by Democrats.

Here’s an analogy that may help make sense of this issue. Elmendorf’s predecessor was a doctrinaire leftist named Peter Orszag. If Orszag’s policy views were a country, they would be France or Greece. By contrast, I’m guessing that Elmendorf would be like Sweden or Germany.

In other words, he wants more government than I do, but at least Elmendorf basically understands that there’s no such thing as a free lunch. He realizes 2+2=4, and he’s aware that there are tradeoffs. And since his arrival, CBO has been much better on issues such as the adverse impact of higher marginal tax rates and the debilitating effect of higher transfer payments.

That being said, while it’s much better to be Sweden rather than Greece, I obviously would prefer to be Hong Kong (or, even better, pre-1913 America).

Though, to continue the analogy, the best I can probably hope for is that Republicans appoint someone akin to Australia or Switzerland.

P.S. For more information about the economics of deficits and fiscal balance, here’s a video I narrated for the Center for Freedom and Prosperity.

P.P.S. The Congressional Research Service made the same argument about higher taxes being pro-growth, asserting in 2010 that “The expiration of the tax cuts would nevertheless reduce the budget deficit, absent other policy changes, which economic theory predicts would have a positive effect on the economy in the long run.”

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A couple of days ago, I wrote that Republicans should not be intimidated if the White House threatens a government shutdown.

Simply stated, prior shutdowns have yielded meaningful policy victories without causing measurable political damage.

This isn’t to say that the goal of any fiscal fight is a shutdown. Instead, my point is simply that Republicans shouldn’t strengthen the bargaining position of the White House by announcing that they will do whatever it takes to avoid a government shutdown.

This shouldn’t be a controversial assertion.

For instance, Obama could threaten that he won’t sign a spending bill unless Republicans agree to a top tax rate of 90 percent.* Do Republicans acquiesce to that demand?

Or what if the President says he will veto spending legislation if it doesn’t include nationalization of the oil industry. Or expanded Obamacare. Should the GOP say yes?

Based on the no-shutdown-for-any-reason rule, Republicans would have to surrender to these hypothetical demands. I’ve called this the “French Army” approach to budget policy since Obama always wins.

But that won’t happen. I’m guessing 90 percent-plus of GOP politicians and GOP-friendly pundits would agree that a line should be drawn in the sand based on the extreme examples I provided, even if it means a shutdown of the government because Obama vetoes a spending bill that doesn’t include those provisions.

In other words, Republicans presumably don’t actually believe in the no-shutdown-for-any-reason rule. Instead, they are simply signalling that they don’t think it makes sense to have a shutdown fight based on the fights that are likely to occur in the near future.

But that creates a problem for the GOP. In the short run, it means the White House gets to unilaterally grant amnesty to certain illegal aliens. More important (at least from my perspective as a fiscal policy wonk), it gives Obama the upper hand in battles that may take place next year over issues such as spending caps and Obamacare funding.

To their credit, Republican leaders recognize the problem, so they’re searching for a strategy that would achieve their objectives without a government-wide shutdown.**

A story in Politico lays out their most recent maneuvering.

Republican leaders have intensified their planning to prevent a government funding showdown, weighing legislative options that would redirect GOP anger at Barack Obama’s expected action on immigration and stave off a political disaster, according to sources involved with the sessions. …Speaker John Boehner, Senate Minority Leader Mitch McConnell and their top aides and deputies are mulling several options that would give Capitol Hill Republicans the opportunity to vent their frustration with what they view as an unconstitutional power grab by the White House — without jeopardizing the government financing bill. The options include…passing two separate funding bills — a short-term bill with tight restrictions on immigration enforcement agencies, and another that would fund the rest of the government until the fall.

I’m tempted to grouse about the reporter’s bizarre claim of “political disaster” for the GOP. After all, the recent mid-term elections were a huge victory for Republicans.

But let’s instead focus on the idea of having two spending bills, one that funds 99 percent of the government, presumably without controversy, and one that funds – with controversial restrictions – the relatively tiny parts of government that deal with immigration enforcement.

The story continues, pointing out that some sort of fight is inevitable.

…what exactly Republicans can do outside of the funding process to stop Obama remains an open question. Even if they had enough votes to pass a stand-alone bill, it would almost certainly be vetoed by Obama — and the GOP would likely lack the votes to overturn it.

So does this mean part of the immigration bureaucracy would be shut down for the rest of the fiscal year?

Presumably not, though it’s unclear whether Obama or Congress would have any incentive to compromise and strike a deal.

Regardless, some pundits like this potential strategy for the GOP. Ramesh Ponnuru, writing for Bloomberg, thinks it puts pressure on the Democrats.

Why not try to pass a funding bill that pays for all of the operations of the federal government except for Citizenship and Immigration Services, the agency in the Homeland Security Department that would carry out Obama’s order? They could then try to pass another bill that just funds that agency — but with a restriction saying no money can be used for the president’s amnesty. What would the Democrats do then? If they block a big funding bill that has nothing to do with immigration over the issue, it becomes hard to deny that they’re the ones shutting down the government to get their way. If they don’t block it, they’ll have no government shutdown to complain about — and the parties could move on to a more narrowly focused fight about the immigration budget.

And in a column for the Washington Examiner, Byron York also seems favorable toward the strategy.

…in January, with the GOP in control — and, presumably, Obama’s edict in hand — Republicans will work on crafting a new spending measure that funds the entire government, with the exception of the particular federal offices that will do the specific work of enforcing Obama’s order.

Byron assumes that Obama will sign the big bill that funds almost everything and then fight about the mini-bill funding the small part of the Department of Homeland Security that deals with immigration enforcement.

…the president will veto it. At that point, a shutdown battle could occur — but it would be a battle over shutting down the small part of the federal government tasked with enforcing the immigration order. Everything else would remain up and running.

So is this a successful approach, one that not only can derail Obama’s executive amnesty but also could be used for next year’s fiscal battles?

I’m not as confident as Ramesh and Byron for the simple reason that (if he asked me) I would tell Obama to veto the bill that funds 99 percent of the government and justify his actions by stating that he “won’t be blackmailed” by Congress.

Ramesh correctly points out in his column that the resulting shutdown won’t be the fault of Republicans, but will that be apparent to voters? Particularly in the midst of a battle when the establishment press will be acting as an echo chamber for White House talking points?

Maybe I’m wrong, but a government-wide shutdown seems like the most effective strategy for Obama. He won’t be asking my opinion, of course, but I’m sure he has plenty of advisers who would reach the same conclusion about how to proceed.

Which means that Republicans ultimately will have to decide whether they have any policy preferences that are sufficiently important that they’re willing to fight for them even if Obama forces a shutdown.

It’s a judgement call, and here are two examples to illustrate why you shouldn’t tilt at windmills and launch suicide missions, but also why you shouldn’t unilaterally disarm.

Example #1: The Department of Education should be abolished, a goal that theoretically could be largely achieved by not appropriating any funds when spending bills are put together in 2016, though it certainly would lead to a shutdown fight beginning about one month before the presidential election.

Example #2: The debt limit fight of 2011 produced some much-needed spending caps and sequester enforcement, but the White House is very opposed and may be so committed to undoing those policies and expanding the size of government that it forces a shutdown fight next year.

Looking at these options, even a curmudgeonly libertarian such as myself won’t be urging lawmakers to have the shutdown fight in Example #1.

However, I’m hoping that establishment GOPers will show a similar blend of principle and pragmatism by being willing to have the fight with Obama outlined in Example #2.

*Spending bills (known as appropriations bills inside the beltway) technically are not supposed to include the types of policy changes used in my examples, but Obama could say he won’t sign a spending bill if there isn’t accompanying legislation to accomplish one of more of the listed objectives. Or he could even demand that a spending bill include language stating that a certain amount of money should be dedicated to a particular bureaucracy for purposes of achieving a specific policy.

**One surreal part of this debate is that “shutdown” is a somewhat misleading term since most of the government (the military, air traffic control, etc) actually continues to operate.

P.S. I’ve already shared some amusing video, commentary, and cartoons about “Grubergate.”

Well the folks at American Commitment have put together a highlight video for your enjoyment.

And here are some Grubergate cartoons. We’ll start with one from Robert Gorrell.

Michael Ramirez is in fine form as usual.

Here’s one from Dana Summers.

Eric Allie has an amusing addition to our collection.

Henry Payne also gets in a good jab.

Last but not least, Chip Bok nicely captures the attitude of Washington DC.

These are all funny cartoons, but you know who’s laughing the hardest right now?

The answer is Jonathan Gruber, because he got about $6 million of our money as part of insider contracts from government.

In other words, I wasn’t kidding when I wrote that Obamacare is a get-rich-quick scheme for the political elite.

Just another example of how big government enables sleazy corruption.

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Notwithstanding the landslide rejection of Obama and his policies in the mid-term election, I don’t think this will produce big changes in policy over the next two years.

Simply stated, the GOP does not have the votes to override presidential vetoes, so there’s no plausible strategy for achieving meaningful tax reform or genuine entitlement reform.

But that doesn’t mean that there won’t be important fiscal policy battles. I’m especially worried about whether we can hold on to the modest fiscal restraint (and sequester enforcement) we achieved as part of the 2011 debt limit fight.

Part of that victory was already negotiated away as part of the Ryan-Murray budget deal, to be sure, but there are still remaining budget caps that limit how fast politicians can increase so-called discretionary spending.

According to the Congressional Research Service, budget authority for defense is allowed to rise from $552 billion in 2014 to $644 billion in 2021. And budget authority for domestic programs is allowed to climb from $506 billion to $590 billion over the same period.

I think that’s too much spending, but the interest groups, lobbyists, cronyists, politicians, bureaucrats, and other insiders in Washington would like much bigger increases. And you won’t be surprised to learn that the Obama Administration also wants to bust the spending caps.

This is why I’m very worried that some Republicans are undercutting their negotiating position by saying that there will be no government shutdowns.

Let me explain how these issues are connected. At some point next year, Republicans on Capitol Hill will be responsible for putting together spending bills for the following fiscal year. They presumably (or am I being too optimistic?) will put together budget bills that comply with the existing spending caps.

Obama will then say he will veto such legislation and demand that Republicans unilaterally surrender by enacting bigger spending increases and also gutting sequestration. The GOP will then have two options:

A) they can surrender.

B) they can continue to send the President spending bills that comply with the law.

But if they go with option B and the President uses his veto pen, then the government shuts down. And even though the shutdown only occurs because the President wants to renege on the deal he signed in 2011, Republicans are afraid they’ll get blamed.

The Washington Post reports on this fearful attitude, citing the anti-shutdown perspective of the incoming Senate Majority Leader.

A day after he won reelection and Republicans retook the Senate, Sen. Mitch McConnell (R-Ky.) left no doubt… “Let me make it clear: There will be no government shutdowns…,” McConnell said in a valedictory news conference in Louisville.

But that view irks some lawmakers who worry Obama will then have a blank check.

The first battle may revolve around immigration amnesty, but – as noted above – I’m more focused on fiscal fights.

But McConnell could be tripped up by the same conservative forces that have undercut Boehner since he became speaker in 2011. The issue this time is Obama’s expected executive action to overhaul the nation’s immigration system.conservatives…have urged McConnell and Boehner to fight back by allowing only a short-term budget bill that would keep government agencies open until early next year. These conservatives believe that once Republicans hold both chambers of Congress next year, they can force Obama to accept a budget bill that would prohibit him from implementing his executive order on immigration.

At this point in the article, the reporter, Paul Kane, engages in some anti-factual editorializing.

…the days of brinkmanship could return with a vengeance, and the government could once again be shut down. That could provide a devastating blow to Republicans, hurting their chance to win back the White House and hold on to their relatively slim Senate majority in 2016.

Huh?!? Republicans just won a landslide, so why are we supposed to believe last year’s shutdown was “a devastating blow”?

Mr. Kane also refers to a shutdown later in the article as a “fiscal calamity” even though he shows no evidence (because there wasn’t any) that government shutdowns cause any damage.

But there is at least one person who is convinced by this narrative. And that person, Senator McConnell, is preemptively trying to convince other GOP Senators to give Obama the upper hand in any fiscal negotiations.

McConnell’s advisers are worried enough that by Friday evening they were circulating a memo showing how damaging last year’s shutdown was to the Republican Party — an effort designed to counter conservatives who point to this month’s triumphant election as proof that the shutdown did little damage. …The memo showed that in Gallup polling from late 2012 until this month, …Republicans held steady just a couple of points lower through 2012 and most of 2013 — until the 16-day shutdown of the federal government in October 2013. In just a few weeks, the McConnell chart shows, Republican favorability plummeted 10 points. It has taken a year for it to climb back to where it was before the shutdown.

But who cares about “favorability” ratings. The poll that really matters is the one that takes place on election day.

And here’s some of what I wrote in my post about lessons that could be learned from the 2014 elections.

Back in 2011, I explained that Republicans could play hard ball, largely based on what really happened during the 1995 government shutdown. And in 2013, I again defended a shutdown, pointing out that voters probably wouldn’t even notice that some government offices were closed, but they would remember that the GOP was branding itself as the anti-Obamacare party. The establishment, by contrast, thought the shutdown was a disaster for Republicans. …many…Republicans felt the same way, excoriating Senator Cruz and others who wanted a line-in-the-sand fight over government-run healthcare. The moral of the story isn’t that shutdowns necessarily are politically desirable, but rather that it’s very important for a political party to find visible ways of linking itself to popular causes (such as ending Obamacare, fighting big government, etc).

At least one person agrees with me. Jeffrey Lord, writing for the American Spectator, points out the GOP establishment was wrong about the political impact of the 2013 government shutdown.

The whole event was giving prominent Republicans in and out of office the political willies. …Republican senators, congressmen, governors, ex-office holders, potential presidential candidates, lobbyists and pundits…were spreading the word. That word? …it was some version of curtains for the GOP. The party would be toast. …they all got it wrong. Not just wrong, but Big Time Wrong. A week ago the Republican Party — barely a year away from the government shut down these folks were bewailing in various terms as bad strategy that “will lose more” for Republicans than Democrats — won a blowout election. …Will Republicans learn anything here?Do you think Mitch McConnell makes the connection between the government shutdown of 2013 and the fact that he is about to become Senate Majority Leader?

To be fair, we don’t know what would have happened if there wasn’t a shutdown in 2013, so maybe the GOP still would have taken the Senate.

But there’s also no doubt that the GOP benefited by having a big public fight about Obamacare. Voters didn’t remember the shutdown, but they did remember that Republicans were against the President’s government-run healthcare scheme and they remembered that Democrats were for it.

I have no idea whether that made a difference in one Senate race of six Senate races, but Obamacare clearly was an albatross for Democrats.

In closing, I want to point out that there are limits to a shutdown strategy.

Picking a fight (or, more accurately, refusing to surrender to Obama) in 2015 is almost surely a winning strategy. But having the same fight in October of 2016 probably wouldn’t be very smart, particularly since the establishment press would do everything possible to spin the fight in ways that advance Hillary Clinton (or some other Democrat presidential nominee).

In other words, context matters. Pick the right fight.

But the bottom line is that Republicans – assuming they don’t intend to acquiesce on every single issue – must be prepared to let Obama veto spending bills and shut down the government.

Returning to the American Spectator story, Ted Cruz may not be very popular with some of his colleagues, but I think he made an unassailable point about what happens if the GOP unilaterally disarms.

Cruz…asked them for their alternative. Cruz paused, then said that the response he got was “the sound of crickets chirping.”

P.S. One reason why Republicans are skittish about shutdowns is that they think they last the 1995 fight with Bill Clinton. But if you lived through that battle (or if you look at contemporaneous news reports), it’s clear the Republicans had the upper hand.

P.P.S. Here are the five lessons I shared immediately after the 2013 shutdown fight.

P.P.P.S. If you want to enjoy some shutdown humor, click herehere, here, and here. And if you prefer sequester cartoons, click here, here, here, here, here, and (my favorite) here.

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The Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) are congressional bureaucracies that wield tremendous power on Capitol Hill because of their role as fiscal scorekeepers and referees.

Unfortunately, these bureaucracies lean to the left. When CBO does economic analysis or budgetary estimates, for instance, the bureaucrats routinely make it easier for politicians to expand the burden of government spending. The accompanying cartoon puts it more bluntly.

And when JCT does revenue estimates, the bureaucrats grease the skids for anti-growth tax policy by overstating revenue losses from lower tax rates and overstating revenue gains from higher tax rates.

Here are some examples of CBO’s biased output.

The CBO – over and over again – produced reports based on Keynesian methodology to claim that Obama’s so-called stimulus was creating millions of jobs even as the unemployment rate was climbing.

CBO has produced analysis asserting that higher taxes are good for the economy, even to the point of implying that growth is maximized when tax rates are 100 percent.

Continuing a long tradition of under-estimating the cost of entitlement programs, CBO facilitated the enactment of Obamacare with highly dubious projections.

CBO also radically underestimated the job losses that would be caused by Obamacare.

When purporting to measure loopholes in the tax code, the CBO chose to use a left-wing benchmark that assumes there should be double taxation of income that is saved and invested.

On rare occasions when CBO has supportive analysis of tax cuts, the bureaucrats rely on bad methodology.

But let’s not forget that the JCT produces equally dodgy analysis.

The JCT was wildly wrong in its estimates of what would happen to tax revenue after the 2003 tax rate reductions.

Because of the failure to properly measure the impact of tax policy on behavior, the JCT significantly overestimated the revenues from the Obamacare tax on tanning salons.

The JCT has estimated that the rich would pay more revenue with a 100 percent tax rate even though there would be no incentive to earn and report taxable income if the government confiscated every penny.

This means the JCT is more left wing than the very statist economists who think the revenue-maximizing tax rate is about 70 percent.

Unsurprisingly, the JCT also uses a flawed statist benchmark when producing estimates of so-called tax expenditures.

Though I want to be fair. Sometimes CBO and JCT produce garbage because they are instructed to put their thumbs on the scale by their political masters. The fraudulent process of redefining spending increases as spending cuts, for instance, is apparently driven by legislative mandates.

But the bottom line is that these bureaucracies, as currently structured and operated, aid and abet big government.

Regarding the CBO, Veronique de Rugy of Mercatus hit the nail on the head.

The CBO’s consistently flawed scoring of the cost of bills is used by Congress to justify legislation that rarely performs as promised and drags down the economy. …CBO relies heavily on Keynesian economic models, like the ones it used during the stimulus debate. Forecasters at the agency predicted the stimulus package would create more than 3 million jobs. …What looks good in the spirit world of the computer model may be very bad in the material realm of real life because people react to changes in policies in ways unaccounted for in these models.

And the Wall Street Journal opines wisely about the real role of the JCT.

Joint Tax typically overestimates the revenue gains from raising tax rates, while overestimating the revenue losses from tax rate cuts. This leads to a policy bias in favor of higher tax rates, which is precisely what liberal Democrats wanted when they created the Joint Tax Committee.

Amen. For all intents and purposes, the system is designed to help statists win policy battles.

No wonder only 15 percent of CPAs agree with JCT’s biased approach to revenue estimates.

So what’s the best way to deal with this mess?

Some Republicans on the Hill have nudged these bureaucracies to make their models more realistic.

That’s a helpful start, but I think the only effective long-run option is to replace the top staff with people who have a more accurate understanding of fiscal policy. Which is exactly what I said to Peter Roff, a columnist for U.S. News and World Report.

…the new congressional leadership should be looking at ways to reform the way the institution does its business – and the first place for it to start is the Congressional Budget Office. Most Americans don’t know what the CBO is, how it was created or what it does. They also don’t know how vitally important it is to the legislative process, especially where taxes, spending and entitlement reform are concerned. As Dan Mitchell, a well-respected economist with the libertarian Cato Institute, puts it in an email, the CBO “has a number-crunching role that gives the bureaucracy a lot of power to aid or hinder legislation, so it is very important for Republicans to select a director who understands the economic consequences of excessive spending and punitive tax rates.”

Heck, it’s not just “very important” to put in a good person at CBO (and JCT). As I’ve written before, it’s a test of whether the GOP has both the brains and resolve to fix a system that’s been rigged against them for decades.

So what will happen? I’m not sure, but Roll Call has a report on the behind-the-scenes discussions on Capitol Hill.

Flush from their capture of the Senate, Republicans in both chambers are reviewing more than a dozen potential candidates to succeed Douglas W. Elmendorf as director of the Congressional Budget Office after his term expires Jan. 3. …The appointment is being closely watched, with a number of Republicans pushing for CBO to change its budget scoring rules to use dynamic scoring, which would try to account for the projected impact of tax cuts and budget changes on the economy.

So who will it be? The Wall Street Journal weighs in, pointing out that CBO has been a tool for the expansion of government.

…the budget rules are rigged to expand government and hide the true cost of entitlements. CBO scores aren’t unambiguous facts but are guesses about the future, biased by the Keynesian assumptions and models its political masters in Congress instruct it to use. Republicans who now run Congress can help taxpayers by appointing a new CBO director, as is their right as the majority. …The Tax Foundation’s Steve Entin would be an inspired pick.

I disagree with one part of the above excerpt. Steve Entin is superb, but he would be an inspired pick for the Joint Committee on Taxation, not the CBO.

But I fully agree with the WSJ’s characterization of the budget rules being used to grease the skids for bigger government.

In a column for National Review, Dustin Siggins writes that Bill Beach, my old colleague from my days at the Heritage Foundation, would be a good choice for CBO.

…few Americans may realize  that the budget process is at least as twisted as the budget itself. While one man can’t fix it all, Republicans who want to be taken seriously about budget reform should approve Bill Beach to head the Congressional Budget Office (CBO). Putting the right person in charge as Congress’s official “scorekeeper” would be an important first step in proving that the party is serious about honest, transparent, and efficient government. …CBO has several major structural problems that a new CBO director should fix.

Hmm… Entin at JCT and Beach at CBO. That might even bring a smile to my dour face.

But it doesn’t have to be those two specific people. There are lots of well-regarded policy scholars who could take on the jobs of reforming and modernizing the work of JCT and CBO.

But that will only happen if Republicans are willing to show some fortitude. And that means they need to be ready to deal with screeching from leftists who want to maintain their control of these institutions.

For example, Peter Orszag, a former CBO Director who then became Budget Director for Obama (an easy transition), wrote for Bloomberg that he’s worried GOPers won’t pick someone with his statist views.

The Congressional Budget Office should be able to celebrate its 40th anniversary this coming February with pride. …The occasion will be ruined, however, if the new Republican Congress breaks its long tradition of naming an objective economist/policy analyst as CBO director, when the position becomes vacant next year, and instead appoints a party hack.

By the way, it shows a remarkable lack of self-awareness for someone like Orszag to complain about the possibility of a “party hack” heading up CBO.

In any event, that’s just the tip of the iceberg. I fully expect we’ll also see editorials very soon from the New York Times, Washington Post, and other statist outlets about the need to preserve the “independence” of CBO and JCT.

Just keep in mind that their real goal is to maintain their side’s control over the process.

P.S. There’s another Capitol Hill bureaucracy, the Congressional Research Service, that also generates leftist fiscal policy analysis. Fortunately, the CRS doesn’t have any scorekeeper or referee role, so it doesn’t cause nearly as much trouble. Nonetheless, any bureaucracy that produces “research” about higher taxes being good for the economy needs to be abolished or completely revamped.

P.P.S. This video explains the Joint Committee on Taxation’s revenue-estimating methodology. Pay extra attention to the section beginning around the halfway point, which deals with a request my former boss made to the JCT.

P.P.P.S. If you want to see some dramatic evidence that lower tax rates don’t necessarily lead to less revenue, check out this amazing data from the 1980s.

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I’ve been fretting for a long time that poorly designed entitlement programs are going to turn America into a decrepit welfare state.

Medicare obviously is a big part of the problem, but the fraud-riddled Medicaid program may be even worse.

The program is a nightmare for both federal taxpayers and state taxpayers.

In an article for the Daily Caller, John Graham of the Independent Institute has some very grim analysis of the fiscal black hole otherwise known as Medicaid.

In 2014, total Medicaid spending is projected to grow 12.8 percent because Obamacare has added about 8 million dependents. A large minority of states have chosen to increase residents’ eligibility for Medicaid by expanding coverage to adults making up to 138 percent of the federal poverty level. Unfortunately, more states are likely to expand this welfare program. This is expected to result in a massive increase in the number of Medicaid dependents: From 73 million in 2013 to 93 million in 2024. Medicaid spending is expected to grow by 6.7 percent in 2015, and 8.6 percent in 2016. For 2016 to 2023, spending growth is projected to be 6.8 percent per year on average. This comprises a massive increase in welfare dependency and burden on taxpayers.

But the actual numbers may be worse than these projections.

…official estimates often low-ball actual experience. This is because it is hard to grapple with how clever states are at leveraging federal dollars. …The incentive lies in Medicaid’s perverse financing merry-go-round. In a rich state like California, for example, the federal government (pre-Obamacare) spent 50 cents on the dollar for adult dependents. So, if California spent 50 cents, it automatically drew 50 cents from the U.S. Treasury. And most states had a bigger multiplier. Which state politician can resist a deal like that? …The situation will deteriorate because Obamacare’s Medicaid expansion significantly increases states’ perverse incentives to game Medicaid financing. …Newly eligible Medicaid beneficiaries will be fully financed by the federal government for 2014 through 2016. Then, it slides down until the federal government funds 90 percent of their costs starting in 2020, with the states footing 10 percent. Recall the cunning with which states developed ways to abuse federal taxpayers when they could only double their money from Uncle Sam. The new normal is that they will be able to get nine times their money!

By the way, these numbers would be even worse if it wasn’t for the fact that many states refused the lure of “free” federal money to expand Medicaid.

So what’s the solution? Graham suggests federalism is the answer.

A reform in the right direction would be to get rid of the federal match in favor of a block grant, based on a simple measurement of the population in each state, and precisely define a limited federal commitment.

He’s exactly right, at least in the short run.

Let’s copy the success of welfare reform and turn over a fixed amount of money – along with concomitant authority and responsibility – to state governments and let them figure out the best way of delivering health care to lower-income populations.

In the long run, of course, I’d like to phase out the block grant so that states are responsible for both collecting the money and providing the services.

But before we get to the point of adopting health care policies for an ideal libertarian society, we first have to stop the bleeding (or, to be more accurate, hemorrhaging) and stabilize the program.

And that’s why I fully agree that the federalism approach, in the form of block grants, is the right policy.

Here’s my video on the topic.

And since I’m sharing videos, I can’t resist commenting on the latest “Gruber-gate” scandal. The MIT professor and Obamacare insider (he got $400,000 of taxpayer money to help design the plan) has become an embarrassment for the left because he has been caught on tape saying that the legislation relied on deception. He even said that proponents of Obamacare took advantage of the “stupidity” of American voters.

You can watch the most well-know example by clicking here. But he also denigrated supposedly “stupid” Americans in this video.

I want to defend one small component of Gruber’s statement.

But I want to be completely clear that I’m not defending his elitist disdain for ordinary Americans. Indeed, I don’t think voters are stupid. Instead, to the extent they’re uninformed, it’s the result of serial dishonesty from Washington or because they’ve decided it’s not worth their time to pay attention to the crowd in DC (the “rational ignorance” hypothesis).

The part of Gruber’s statement that has merit is that he’s talking about the fact that there’s a big loophole in the tax code for fringe benefits. To be more specific, tens of millions of Americans get part of their compensation in the form of fringe benefits such as health insurance. Yet while workers are taxed on their “cash” income, they are not taxed on their “fringe benefit” income (a policy sometimes called the “healthcare exclusion”).

And this has created, over time, a very inefficient system of over-insurance.

To understand why this system doesn’t make sense, just think about your homeowner’s insurance or auto insurance. Those policies, unlike health insurance, work reasonably well and costs remain relatively stable. Why is there a big difference?

The difference is that employee income that is diverted to health insurance avoids both income tax and payroll tax, so there is a significant monetary incentive for gold-plated plans. And these plans often include insurance coverage for ordinary medical expenses, which contributes to the problem of third-party payer.

No wonder health insurance is so costly. After all, imagine what would happen to the price of your homeowner’s insurance if it had to cover the cost of a new couch? Or repainting the hallway? Or what about the cost of your auto policy if it covered the cost to fill up with gas or get an oil change?

We instinctively recognize that this would be insanely inefficient and expensive, yet that’s how our health insurance system operates thanks to a giant tax preference.

So Gruber was right to say it’s a problem. And I’ve even said that addressing the exclusion is a very tiny silver lining in the awful dark cloud of Obamacare.

But now that I’ve bent over backwards to say something nice, now let me point out that Gruber (and Obama and other statists) didn’t have the right solution. Yes, they wanted to cut back on the tax exclusion, but only because they wanted to use the money for other purposes (such as subsidies that also exacerbate the third-party payer problem).

The right approach, by contrast, is to phase out the healthcare exclusion and use every penny of revenue to “pay for” lower tax rates. That way you get a win-win situation for the economy. A more rational, market-based healthcare system and a less punitive tax code for productive behavior.

Now that we’ve addressed a serious point, let’s laugh about the fact that Gruber’s comments have created a big headache for the White House. We’ll start with this Steve Kelley cartoon.

And here’s Gary Varvel’s take on the honesty of the Obama White House on the topic of health care.

Last but not least, Lisa Benson optimistically suggests that the serial dishonesty of Obamacare supporters may be undone by the Supreme Court.

Which would be poetic justice, since Professor Gruber also was caught on tape – over and over again – stating that Obamacare only allowed subsidies for people getting insurance policies through state-based exchanges.

And now the Supreme Court will decide whether those subsidies, notwithstanding statutory language, can be provided via the federal exchange.

Though I’m not holding my breath since certain Justices on the Court already have demonstrated that they’re willing to put politics above the law.

P.S. Just in case I wasn’t sufficiently clear, good tax reform also is good health reform. That was one of the points I made in my tax reform speech at the Heritage Foundation and I suspect I’ll continue making that argument until we win or I’m dead (and I don’t want to take odds on which happens first).

P.P.S. On a more upbeat note, the House of Representatives approved budgets in 2011, 2012, 2013, and 2014 that assume Medicaid gets block-granted to the states. So that reform may actually happen while I’m still breathing.

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I’ve argued that we’ll get better government if we make it smaller.

And Mark Steyn humorously observed, “our government is more expensive than any government in history – and we have nothing to show for it.”

But can these assertions be quantified?

I had an email exchange last week with a gentleman from Texas who wanted to know if I had any research on the efficiency of government. He specifically wanted to know the “ratio of federal tax dollars collected to the actual delivery of the service.”

That was a challenge. If he simply wanted examples of government waste, I could have overloaded his inbox.

But he wanted an efficiency measure, which requires apples-to-apples comparisons to see which jurisdictions are delivering the most output (government services) compared to input (how much is spent on those services).

My one example was in the field of education, where I was ashamed to report that the United States spends more per student than any other nation, yet we get depressingly mediocre results (though that shouldn’t be a surprise for anyone who has looked at this jaw-dropping chart comparing spending and educational performance).

But his query motivated me to do some research and I found an excellent 2003 study from the European Central Bank. Authored by Antonio Afonso, Ludger Schuknecht, and Vito Tanzi, the study specifically examines the degree to which governments are providing value, and at what cost.

The objective of this paper is to provide a proxy for measuring public sector performance and efficiency. To do this we will put together a number of performance indicators in the government’s core functions. …We will set these indicators in relation to the costs of achieving them. We will, hence, derive simple performance and efficiency indicators for 1990 and 2000 for the public sectors of 23 industrialised OECD countries. …As a first step, we define 7 sub-indicators of public performance. The first four look at administrative, education, health, and public infrastructure outcomes. …The three other sub-indicators reflect the “Musgravian” tasks for government. These try to measure the outcomes of the interaction with and reactions to the market process by government. Income distribution is measured by the first of these indicators. An economic stability indicator illustrates the achievement of the stabilisation objective. The third indicator tries to assess allocative efficiency by economic performance.

Here’s a flowchart showing how they measured public sector performance.

I should explain, at this point, that I’m not a total fan of the PSP measure. Most of the indicators are fine, but some rub me the wrong way.

I think an even distribution of income is a nice theoretical concept, for instance, but I don’t think it can be mandated by government (unless the goal is to make everybody poor). Economic stability also isn’t necessarily a proper goal. I’d much rather live in a society that oscillates between 7 percent growth and -2 percent growth if the only other alternative was a society that had very stable 1 percent growth.

But enough nit-picking on my part. What did the study find when looking at public sector performance?

Indicators suggest notable but not extremely large differences in public sector performance across countries… Looking at country groups, small governments (industrialised countries with public spending below 40 % of GDP in 2000) on balance report better economic performance than big governments (public spending above 50 % of GDP) or medium sized governments (spending between 40 and 50 percent of GDP).

These are remarkable findings. Nations with small governments achieve better outcomes.

And that’s including some indicators that I don’t even think are properly defined.

But what’s most amazing if that the above findings are simply based on an examination of outputs.

So what happens if we also look at inputs so we can gauge the degree to which governments are delivering a lot of bang for the buck?

Public expenditure, expressed as a share of GDP, can be assumed to reflect the opportunity costs of achieving the public sector performance estimated in the previous section. …Public expenditures differ considerably across countries. Average total spending in the 1990s ranged from around 35 percent of GDP in the US to 64 percent of GDP in Sweden. The difference is mainly due to more or less extensive welfare programs. …we now compute indicators of Public Sector Efficiency (PSE). We weigh performance (as measured by the PSP indicators) by the amount of relevant public expenditure, PEX, that is used to achieve a given performance level.

And what did the experts discover? Here’s a chart showing the results.

There’s a lot of data, particularly if you’re looking at individual countries. But if you want the bottom-line results, look at the numbers circled in red.

As you can see, countries with small governments are far more productive and efficient.

We find significant differences in public sector efficiency across countries. Japan, Switzerland, Australia, the United States and Luxembourg show the best values for overall efficiency. Looking at country groups, “small” governments post the highest efficiency amongst industrialised countries. Differences are considerable as “small” governments on average post a 40 percent higher scores than “big” governments. …This illustrates that the size of government may be too large in many industrialised countries, with declining marginal products being rather prevalent.

The conclusion of the study makes some very important observations.

Unsurprisingly, countries with small public sectors report the “best” economic performance… Countries with small public sectors report significantly higher PSE indicators than countries with medium-sized or big public sectors. All these findings suggest diminishing marginal products of higher public spending. …Spending in big governments could be, on average, about 35 per cent lower to attain the same public sector performance.

Though I can’t help but wonder what the results would have been if Hong Kong and Singapore also were added to the mix.

After all, I don’t consider the United States to have a “small” government. Same for Japan, Switzerland, and Australia. Those are simply nations where government isn’t as big and bloated as it is in France, Italy, Sweden, and Greece.

Or imagine the results if you could measure public sector performance and public sector efficiency for the United States and other developed nations in the pre-World War I era, back when the burden of government spending averaged less than 10 percent of economic output.

I strongly suspect we got far more “bang for the buck” when government was genuinely small.

But I don’t want to make the perfect the enemy of the good, so let’s focus on the results of the study. The clear message is that big governments spend a lot more and deliver considerably less.

And that’s a very worrisome message since the burden of government is projected to increase substantially in the United States thanks to demographic changes and poorly designed entitlement programs.

So at the very least, we should do everything possible to reform those programs to keep America from becoming Greece.

And once we achieve that goal, then we can try to reduce the size and scope of government so we’re more like Hong Kong and Singapore., with only about 20 percent of GDP diverted to government.

Then, in my libertarian fantasy world, we can cut, prune, privatize, and eliminate until government once again only consumes about 10 percent of economic output.

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