Archive for August, 2007
Federal Pay: Shoot the Messenger
Fedsmith.com ran a commentary today about the new data I cited on average federal worker compensation.
Most of the 31 comments on my blog and the commentary so far are hostile, and many take a “shoot the messenger” approach. Folks, it’s not my data. I didn’t use “fuzzy math” or “twist” the data. The data comes straight from the U.S. Bureau of Economic Analysis.
Yes, averages are only one indicator of pay gaps. But is it justified that the federal average has grown so much more quickly than the private sector average? Why should fringe benefits in the government workforce be so much more generous than in the private workforce?
And shouldn’t we have a “government of the people” rather than a class of elite overlords increasingly separated from the realities of taking risks, being fired, facing salary cuts in downturns, and having to work hard to get pay raises?
More E-voting Security Flaws
There’s been a lot of e-voting news this week. A California research team released a report demonstrating serious security flaws in the touch-screen voting machines in use there. And a Florida study found that some of the previously-uncovered flaws in the voting machines in use there had not been fixed.
Meanwhile, on Capitol Hill, there have been intense negotiations under way on the Holt-Davis legislation, which would outlaw paperless voting machines and require random audits of voting results. Under the legislation, every voting system would be required to produce a voter-verified paper ballot that would be the official record in the case of a recount.
It’s far from a perfect bill. My preference would be to outlaw touch-screen voting entirely, with or without a paper trail. One of the biggest flaws in the legislation is that it will allow states to use touch-screen voting machines with cheap cash-register-style thermal printers in the 2008 and 2010. In my view, using cheap printers would be a serious mistake; thermal printers frequently jam, and the paper tapes they produce are brittle and hard to deal with. Using such cheap printers dramatically increases the danger that election officials won’t take the paper trail requirement seriously.
Crucially, the Holt-Davis bill doesn’t require states to use touch-screen voting machines at all. States may, and in my opinion should, return to using old-fashioned optical-scan paper ballots. States have been using optical-scan technology for decades, and it has far fewer security flaws than computerized voting machines.
But if states are going to have time to implement changes in time for the 2008 election, Congress needs to act quickly. It would be unfair to state officials to pass legislation in 2008, just months before the election. The Holt-Davis bill isn’t perfect, but as Lawrence Nordin and I argue in an op-ed in The Hill today, it’s a step in the right direction.
Life without Farm Subsidies
When the House passed a massive farm bill last month, supporters justified ongoing subsidies as a “safety net” for family farmers. But a story in the New York Times this morning on the New Zealand dairy industry shows that farmers can survive and thrive in a free market without subsidies.
The story begins by describing how technologically sophisticated the country’s export-oriented dairy industry has had to become to meet global competition.
Dairy farming in New Zealand was not always this sophisticated. But ever since a liberal but free-market government swept to power in 1984 and essentially canceled handouts to farmers — something that just about every other government in an advanced industrial nation has considered both politically and economically impossible — agriculture here has never been the same.
The farming community was devastated — but not for long. Today, agriculture remains the lifeblood of New Zealand’s economy. There are still more sheep and cows here than people, their meat, milk and wool providing the country with its biggest source of export earnings. Most farms are still owned by families, but their incomes have recovered and output has soared.
For more on the lessons we should learn from New Zealand’s successful reforms, check out a Free Trade Bulletin we published in 2005 titled, “Miracle Down Under: How New Zealand Farmers Prosper without Subsidies or Protection.” The Kiwi example also featured prominently in an online debate I had in May with the chief economist of the American Farm Bureau.
The New Zealand dairy industry and our own fruit and vegetable sectors prove that farmers can thrive without government subsidies and trade protection. Yet it looks like we will be saddled for another five years with an expensive and anti-market farm bill.
Another Government Shutdown?
In Wednesday’s OpinionJournal.com Political Diary, John Fund writes that House minority whip Roy Blunt told reporters that he believes President Bush will deliver on his threat to veto the budget bills currently working their way through Congress. And with enough Republicans on record agreeing to uphold the veto, Blunt suggests we might end up witnessing a government shutdown later this year.
As you might recall from the mid-1990s, a federal government shutdown does not mean that every federal agency stops whatever it is they are doing. It’s only the non-essential ones that grind to a temporary halt – and, yes, there is an official definition of what constitutes essential government functions: mainly law enforcement and defense. That Congress continues to fund everything else is what keeps policy wonks like me busy.
Maybe Blunt’s statements are the opening gambit in a political game of chicken. There might be little interest in a government shutdown among the Democratic leaders in Congress. So the follow-up to an upheld Bush veto would likely be a compromise stop-gap measure (like a “continuing resolution” that puts the government on auto-pilot for the rest of the fiscal year) that results in much less spending than would otherwise occur in the course of an unimpeded appropriations cycle.
In either case, those of us who prefer divided government might have another example to add to our growing “Great Moments in Gridlock” list.
More Tax-Funded Media Bias
This morning on Marketplace Radio, there was a clear example of the bias toward government intervention that pervades so much of the establishment media. The story was titled
U.S. finishes last in fuel economy
Online, the introduction reads, “A new report reveals that the U.S. is at the bottom of the barrel when it comes to fuel economy standards. Turns out even China tops us. ” The reporter introduces the topic of a new study on mandatory fuel economy rules in different countries and turns to the study’s author:
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Drew Kodjak: At the bottom of the heap is, unfortunately, the United States.
Study co-author Drew Kodjak says Europe and Japan already have high mile per gallon rules, and they’re gonna get even better.
Kodjak: Out to 2012, Europe is projected to have a 49 MPG passenger fleet. And Japan a 47 in 2015.
Even China’s better than the American 27.5 miles a gallon.
Kodjak: So certainly a very big difference between the leaders and the laggers.
Notice the drumbeat: the United States is “last,” “at the bottom of the barrel,” “at the bottom of the heap,” a “lagger.” Stricter regulation is “better.” And all because our regulations are slightly less intrusive and burdensome than those in other countries. I think we’re better off letting the market determine how much fuel efficiency American consumers want. But my point here is not to argue the issue, but simply to notice that Marketplace Radio, heard on tax-funded radio stations, didn’t argue the issue either. It just indicated to listeners that stricter regulation was “better,” and the United States was a “lagger . . . at the bottom of the heap” for having less stringent regulations.The last time I wrote about a similar one-sided, adjective-laden story on Marketplace, I referred to it as “unconscious liberal bias.” But really, how long can I keep seeing only unconscious bias? I noted in my previous item:
So where’s the bias? Let us count the ways. First, of all the studies in the world, only a few get this kind of extended publicity. It helps if they confirm the worldview of the producers. For instance, I don’t believe Marketplace covered this Swedish study (pdf) showing that the United States is wealthier than European countries (perhaps most provocatively, that Sweden is poorer than Alabama — perhaps because Europe has the kinds of laws the Heymann study advocates). Second, Heymann was allowed to appear without a critic. Third, the interviewer never asked a critical question. He never noted that the countries that Heymann was praising are poorer than the United States and in particular that many are suffering from high unemployment brought on by such expensive labor mandates. Fourth, look at the language of the questions: “lags behind,” “falling short,” “picking up the slack.”
The unstated, perhaps unconscious, premise is that countries should have mandatory paid leave and other such programs. If we don’t, we’re “falling short” and someone must “pick up the slack.” Language like that, which is very common in the media, posits government activism as the natural condition and then positions any lack of a government program as a failure or a problem.
Do Marketplace’s reporters, editors, and producers–and the reporters, editors, and producers at other media outlets–really not recognize that this sort of language biases their coverage?
Is Federal Pay Too High?
Chris Edwards writes below that the gap between federal pay and private-sector pay continues to widen, with federal employees now making more than twice as much as private employees. Meanwhile, a congressional committee is holding hearings on whether federal employees are underpaid or overpaid. Do you think they’ll hear testimony about why federal employees make twice as much as private-sector workers? Or about the fact that federal quit rates are far lower than private-sector quit rates, suggesting that most federal employees are pretty satisfied?
Bad News for Karl Marx
If there is a heaven (or, more appropriately, if there is a hell), Karl Marx must be in a sour mood. The Berlin Wall has disappeared. Communism is dead every place other than Cuba, North Korea, and certain faculty lounges. And now, former Soviet colonies are abandoning his concept of discriminatory taxation and instead adopting simple and fair flat tax regimes. A Czech article discusses the flat tax revolution, which is proceeding in spite of complaints from Western Europe’s uncompetitive welfare states:
Karl Marx might be shocked to see who’s doing what with tax systems in Central and Eastern Europe these days. After all, it’s the capitalist West that won’t abandon progressive tax systems, which Marx championed in The Communist Manifesto, while the former Soviet bloc countries are lining up to buck their old ideological fountainhead by moving to a … single tax rate for nearly all earners, regardless of income. Nowhere has this flat tax caught on more swiftly than in Central and Eastern Europe, where nine of world’s 13 countries to have adopted the system are located. It’s a reform movement that started in 1994 with Estonia, gained momentum when Russia saw a 25-percent increase in state revenue from personal income tax after implementing a 13-percent flat tax in 2001, and culminated with Slovakia’s much-lauded adoption of a single 19-percent rate on income, corporate, and valued added tax three years later. …
Few, if any, of the reforms in Central and Eastern Europe meet the definition of a true flat tax because they include deductions, exemptions, and other exceptions. … Several Western European leaders complain that the lower tax rates … give the newer European Union states an unfair advantage in attracting business.
We Accept the Challenge
Robert Samuelson gets one thing wrong in his Newsweek/Washington Post column this week: Cato isn’t a conservative think tank. At least, I think it would be odd to call scholars “conservative” when they criticize the war in Iraq, the Patriot Act, the growth of executive power, the war on drugs, the holding of American citizens without habeas corpus, the federal marriage amendment, the late lamented sodomy laws, and the general attempts by both right and left to impose their moral values on all Americans through government.
But he’s right on his main point: The growth of entitlement spending, especially for the elderly, is not only a looming fiscal disaster but a fundamental shift in the nature of American government. He proposes
that some public-spirited sugar daddy (the MacArthur Foundation? Warren Buffett?) sponsor a short book. A possible title: “Facing Up to an Aging America.” Six leading think tanks would be invited to participate: three liberal — the Brookings Institution, the Center on Budget and Policy Priorities, and the Urban Institute– and three conservative: the American Enterprise Institute, the Cato Institute and the Heritage Foundation.
We accept. We’ve been writing about the entitlements crisis since 1980 or thereabouts. We’d be glad to join other research institutions in a grand public debate about how big we want government to be and what its appropriate responsibilities are.
New Federal Pay Data
The Bureau of Economic Analysis just released its annual data on employee compensation by industry. (See tables 6.2, 6.3, 6.5, and 6.6).
The new data for 2006 show that 1.8 million federal civilian workers earned an average $111,180 in total compensation (wages plus benefits). That is more than double the $55,470 average earned by U.S. workers in the private sector.
Looking just at wages, federal workers earned an average $73,406, which is 60 percent greater than the $45,995 average earned by private sector workers.
Average federal pay has soared in recent years, growing much faster than private sector pay between 2001 and 2005. However, federal pay growth slowed in 2006, while private sector pay accelerated. As a result, average compensation for federal civilians grew 4.0 percent in 2006, compared to the average in the private sector of 4.2 percent.
Hopefully, federal pay increases will continue slowing to help relieve the soaring taxpayer costs of federal workers. I’ve proposed freezing federal pay to help reduce the deficit and privatizing expensive activities such as air traffic control.
The BEA data show that compensation for federal civilian workers cost taxpayers $203 billion in 2006, up from $145 billion in 2001 when President Bush took office. (The costs of military compensation have grown even more rapidly, from $98 billion in 2001 to $156 billion in 2006).
The acceleration of federal compensation is clear in the figure below covering 1990-2006.
For further information, see
http://www.cato.org/pub_display.php?pub_id=6611
http://www.cato.org/pubs/tbb/tbb-0605-35.pdf
(Data note: The BEA data for number of employees is measured in full-time equivalents.)
French Tax Exiles Unlikely to Go Home
For all the joking about the French (e.g.: Ad seen on E-Bay: French military rifles for sale. Hardly used, only dropped once), they deserve credit for not being dumb enough to trust politicians. A Bloomberg story discusses the huge number of productive people who have fled France’s oppressive tax system and notes that very few of these tax exiles are tempted to return merely because Sarkozy is tinkering with the tax system:
Nicolas Sarkozy is rolling out the welcome mat for thousands of rich French people who fled one of Europe’s most onerous tax regimes. Few may heed his call. In his first economic act as president, Sarkozy is pushing a tax law to lure back exiles such as rock star Johnny Hallyday, 64, and members of the Mulliez clan, who control the French retailer Groupe Auchan SA. The measure will increase exemptions on the “fortune” tax — the bete noire of rich expatriates — and cap the total individual tax rate at 50 percent of income. Sarkozy, 52, needs these wealth-creators to help rekindle an economy that’s lagging behind its neighbors and to sustain future growth. …
“In France, to earn a lot of money is to be seen as a little bit criminal,” says author Anne-Marie Mitterrand, who moved to Belgium in 1997. … “The Right to Laziness,” a 19th century book by Paul Lafargue, Karl Marx’s son-in-law, advised against working more than three hours a day. And French author Honore de Balzac famously said, “Behind every great fortune lies a crime.” This prejudice drove French citizens to Switzerland, Belgium, the U.K. and the
U.S., where at least 500,000 of them reside, either to make more or keep more of what they have. London and the U.S. are preferred refuges for younger people. Switzerland, with about 200,000 French residents, attracts the retired and stars like Hallyday. …Households fleeing the fortune tax climbed to a record 649 in 2005 from 370 in 1997, according to a study by French Senator Philippe Marini. Another study by the Economic Analysis Council, which advises the government, says about 10,000 business directors fled in the last 15 years, taking 70 billion to 100 billion euros ($137 billion) in capital to invest elsewhere. …
Francois Micheloud, a Lausanne lawyer who helps clients settle in Switzerland, says he doubts French exiles will return anytime soon because they distrust government tax policies.
“Carried Interest” Battle Could Be Precursor to Broader Effort to Increase Capital Gains Tax
Writing for the Wall Street Journal, Phil Kerpen of Americans for Prosperity weighs in on the taxation of the returns to private equity funds. He notes, as have others, that the so-called “carried interest” is a capital gain — even if it is then shared with the fund manager. The key message of the article is that the attempt to raise the tax on this type of capital gains is the first step in an effort to raise the tax rate on all capital gains:
Under current law, individual partners in an investment partnership such as a hedge fund or private equity fund are taxed based on what the underlying partnership income is; if the income comes from a capital gain, it is taxed at the capital gains rate. Ordinary income is taxed at ordinary income tax rates. This tax treatment is consistent with the rationale for a lower capital gains tax rate — to alleviate the double taxation of corporate-source income and to encourage risk taking, entrepreneurship and capital formation. The legislation Congress is considering ends those protections, saying in effect that it doesn’t matter if the income is a clear-cut capital gain, such as proceeds from the sale of corporate stock. What matters is who receives the income, in this case politically unpopular rich guys. All investors should be on notice that if the capital gains tax is considered a loophole for investment partnerships, it can’t be long before the capital gains tax is raised for everyone else. Some leading Democrats, including Oregon Sen. Ron Wyden and presidential candidate John Edwards, are already calling to do just that.
Kerpen’s fears are confirmed by a story in the New York Sun. At a Finance Committee hearing, a number of politicians expressed support for broader tax hikes:
Democrats may dodge a tax hike on private equity managers and instead look to raise other taxes that would generate greater revenue from a broader swath of the American economy. At hearings on Capitol Hill yesterday, Senate Democrats voiced fresh doubts about legislative proposals to increase tax rates in the burgeoning private equity industry, questioning both the fairness of the plans and whether they would yield the revenue infusion lawmakers are seeking for the federal coffers. … Lawmakers indicated yesterday that they might turn their attention to more far-reaching tax shifts, such as increasing the rate on capital gains, to 20% from 15%, and the marginal income rate for the top-earning Americans, to 40% from 35%.
Poole on Friedman’s Monetary Legacy
Like Andrew Coulson, I attended an event in honor of Milton Friedman’s birthday yesterday. This one was in Missouri, and it featured Bill Poole, who’s president of the Saint Louis Federal Reserve Bank and a frequent participant in Cato events on monetary policy. The event was sponsored by the University of Missouri and the Show-Me Institute. In his speech, he credited Friedman with making the case that changes in the money supply are a major factor in the business cycle. However, he noted that modern-day central bankers do not agree with Friedman’s contention that central banks should focus on limiting the growth of the money supply:
Everything Milton argued about money stock control is true, but the effect of inflation expectations on the practice of monetary policy itself was, I believe, a missing element in the analysis. The economy functions differently when inflation expectations are firmly anchored. If a central bank allows expectations to become unanchored, then interest-rate control becomes a dangerous and potentially destabilizing policy. But should the practice of monetary policy depend on how well inflation expectations are anchored? I do not recall Milton discussing this question, perhaps because he believed that the best way to maintain well-anchored expectations over time was for the central bank to commit to steady and low money growth under all circumstances.
How does a central bank anchor inflation expectations? One approach would be for the central bank to commit to low and steady money growth come what may. A problem with this approach is that it may not appear credible to the markets when financial instability and/or recession occurs. If a policy of steady money growth has exceptions, can the exceptions be defined in such a way to retain anchored inflation expectations?
A necessary and sufficient condition for anchoring is that the central bank act vigorously to resist inflation or deflation whenever it becomes evident and particularly when inflation expectations change, up or down, in an unwelcome way. If the central bank is willing to push as hard as it takes, regardless of short-run consequences to unemployment and especially to the bond and stock markets, then market participants will develop firm views on the likely rate of inflation in the future. The Fed must convince market participants who bet against it that they will regret their bets.
However, Poole concludes that “Although Milton did not prevail in his quest to have the Fed maintain a constant money-growth rate, he did prevail in his insistence that policy be apolitical and rely to the maximum possible extent on market judgments. He lost a battle but truly did win the war.”
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