Author Archive
The Death of Private Investment
The Bureau of Economic Analysis released third-quarter gross domestic product numbers yesterday, and overall real growth at 3.5 percent was pretty good.
But examining the components of GDP reveals a more disturbing picture. While consumption, exports, and the government sector were up, private investment has fallen through the floor.
Figure 1 reveals a dramatic collapse of private investment over the last two years. In nominal dollars, private investment in 2009 has only been at about the same level as the bottom of the last recession eight years ago (BEA Table 1.1.5).
Figure 2 has the same data in real 2005 dollars (BEA Table 1.1.6). It shows that private investment is stuck in a rut at about 17 percent below the lowest level reached at the bottom of the last recession.
Crist and Cato
Florida’s airwaves are alive with the sound of Governor Charlie Crist’s radio advertisement trumpeting his grade of “A” on Cato’s “Fiscal Policy Report Card on America’s Governors.”
I am pleased that Gov. Crist values Cato’s ratings because we work hard to make them accurate and nonpartisan. But the radio ad is making many fiscally conservative Floridians scratch their heads because of the governor’s recent policy actions.
The governor earned his Cato grade in last year’s report mainly because of his large property tax cuts and moderate spending approach. The grade was based purely on quantitative data on revenues, general fund spending, and tax rate changes.
However, since I wrote the report in mid-2008, the governor seems to have fallen off the fiscal responsibility horse.
In particular, Crist approved a huge $2.2 billion tax increase for the fiscal 2010 budget, even though he had promised that $12 billion in federal “stimulus” money showered on Florida over three years would obviate the need for tax increases.
About $1 billion of the tax increases are on cigarette consumers, which will particularly harm moderate-income families. The rest of the increases are in the form of higher costs for often mandatory services, such as automobile registration, which is really just a sneaky form of tax increases.
These tax increases will be particularly painful to Floridians in the short-term because of the recession. But Crist has also jeopardized the state’s long-term finances with his expanded subsidies for hurricane insurance. Hurricanes are a major challenge in Florida, but giving big subsidies to coastal property owners, driving private insurers out of the state, and guaranteeing a massive state bailout when the next hurricane hits strikes me as the height of fiscally irresponsibility.
More on the Crist campaign here.
Pawlenty
I am very fearful that the Republicans will nominate another Bush-style candidate for 2012. With the government running trillion-dollar deficits, the country needs a hard-line budget-cutter as the next president.
Politico reports: “Minnesota Gov. Tim Pawlenty has been quietly assembling the blueprint of a presidential campaign and will announce Thursday the support of a group of high-level political strategists and donors, complemented by a handful of top new media consultants.”
I gave Pawlenty a “B” in my fiscal report card on the governors last year. Here’s what I said about him:
Tim Pawlenty pledged not to raise taxes when he ran for governor, but his tax record in office is more mixed than that. He backed a $200 million tax increase on cigarette consumers in 2005 and a $109 million corporate tax increase in 2008. He has also supported substantial increases in fees and charges. Pawlenty has provided some targeted tax relief and imposed temporary limits on local property tax increases, but he has not focused on pro-growth tax rate reductions. Nonetheless, Pawlenty’s veto record is impressive, including rejecting a gasoline tax increase, a hike in the top personal income tax rate, and various bloated spending bills. Pawlenty has delivered fairly restrained budgets over the years and kept spending growth to modest increases.
This year, Pawlenty has proposed spending restraint and he has vetoed tax increases. He has also called for cutting the state corporate income tax rate. Still, I’m uneasy about him, so I sure hope the party’s fiscal conservatives thoroughly vet the fellow before he advances too far.
Filed under: Government and Politics; Tax and Budget Policy
Congress Boosts Its Budget
Politico reports: ” Congress is on the verge of giving itself a bump in its annual budget — even as local governments, families and businesses across the country are tightening their belts in the worst recession in decades.”
Spending on the legislative branch of the federal government is set to rise 5.8 percent in fiscal 2010, and Politico details some of the dubious activities that will receive increased funding.
One statement in the story particularly caught my eye:
” ‘We have not seen a significant increase in overall legislative branch expenditures since nearly 2001,’ said Jonathan Beeton, a spokesman for Rep. Debbie Wasserman Schultz (D-Fla.).”
Who is he trying to fool? The bill under consideration will provide $4.7 billion in funding for Congress in 2010, which is way up from the $2.7 billion spent in 2001, according to the Congressional Research Service (page 3).
That’s a 74 percent increase in nine years, representing a very robust 6.4 percent annual average growth rate.
And consider that the “customer base” for this spending has not increased–the number of members of Congress has remained fixed at 535. So while supporters of, say, an education program may say that spending needs to rise because the number of students is rising, much of the increased spending on the legislative branch would seem to go directly into fattening the paychecks of politicians and their staffers.
Debt Aggravates Spending Disease
USA Today’s Dennis Cauchon reports that ”state governments are rushing to borrow money to take advantage of cheap and plentiful credit at a time when tax collections are tumbling.” That will allow them to “avoid some painful spending cuts,” Cauchon notes, but it will sadly impose more pain on taxpayers down the road.
When politicians have the chance to act irresponsibly, they will act irresponsibly. Give them low interest rates and they go on a borrowing binge. The result is that they are in over their heads with massive piles of bond debt on top of the huge unfunded obligations they have built up for state pension and health care plans.
The chart shows that total state and local government debt soared 93 percent this decade. It jumped from $1.2 trillion in 2000 to $2.3 trillion by the second quarter of 2009, according to Federal Reserve data (Table D.3).
Government debt has soared during good times and bad. During recessions, politicians say that they need to borrow to avoid spending cuts. But during boomtimes, such as from 2003 to 2008, they say that borrowing makes sense because an expanding economy can handle a higher debt load. I’ve argued that there is little reason for allowing state and local government politicians to issue bond debt at all.
Unfortunately, the political urge to spend has resulted in the states shoving a massive pile of debt onto future taxpayers at the same time that they have built up huge unfunded obligations for worker retirement plans.
We’ve seen how uncontrolled debt issuance has encouraged spending sprees at the federal level. Sadly, it appears that the same debt-fueled spending disease has spread to the states and the cities.
Filed under: Government and Politics; Tax and Budget Policy
ACORN Challenge for the GOP
Republicans are all over the ACORN scandal and calling for an end to federal subsidies for the group. Well that’s great, but it’s not exactly going out on a limb and pushing for a major budget reform.
Why doesn’t the GOP use this as an opportunity to call for completely ending the programs that funded ACORN? Wouldn’t it be better to save the $13 billion a year that HUD spends on so-called “community development” programs, rather than just the few million dollars a year that taxpayers spend on ACORN?
The federal programs that funded ACORN are particularly wasteful ones, including Community Development Block Grants, Housing Counseling Assistance, and others as Tad DeHaven has explained.
At a minimum, the GOP should be arguing that with deficits of $1 trillion the federal government cannot afford to intervene in classic local and private activities such as community development. Boehner and Canter want the IRS to cut ties with ACORN, but they should be leading the charge to end porky “community development” spending altogether.
Filed under: Government and Politics; Tax and Budget Policy
How Big is American Government?
Federal, state, and local government spending will be 42 percent of U.S. gross domestic product in 2009, according to data from the Organization for Economic Cooperation and Development. That’s huge–more than 4 out of every 10 dollars of everything produced in America now gets channeled through governments.
How does that compare to other advanced nations? Chart 1 shows that total government spending in the United States is somewhat less than the average of the 30 industrial nations in the OECD, but that the U.S. advantage is shrinking. During the 1990s, the U.S. government size was about 10 percentage points smaller than the average OECD government size, but that gap has shrunk and is now only 5 percentage points.
Most of the erosion of America’s smaller government advantage occurred during the early Bush administration years. In the last two years, the recessions and expansionary fiscal actions have boosted the size of governments both here and abroad, as shown in the chart.That’s the bad news. The good news is that some advanced nations have substantially cut the sizes of their governments in recent decades, which illustrates that it can be done. Chart 2 shows total government spending as a share of GDP for the U.S. and for five OECD nations that have had relatively sound fiscal policies. Putting aside the recent recession-induced increases, Canada, New Zealand, and the Netherlands have chopped their governments by roughly 10 percentage points or more since the early 1990s.
What’s the upshot for U.S. policy? Many Americans have been stunned at the rapid expansion in government spending in recent years. But international experience shows that we can stop that expansion and, indeed, reverse it. If Australian, Canadian, Dutch, New Zealand, and Spanish lawmakers can shrink the relative sizes of their governments, then we can to. We just need to elect policymakers who support that goal. That is a tall order, but entirely doable.
Filed under: Government and Politics; Tax and Budget Policy
Funding ACORN
The ACORN scandal provides a good opportunity for citizens concerned about profligacy in Washington to explore some of the tools available to find out where their tax money goes.
A good place to start your research is the Federal Audit Clearinghouse on the Census website. All groups receiving more than $500,000 a year from the government are required to file a report. Just type in “ACORN” as the entity and the system pops up the group’s filings. My assistant John Nelson summarized the federal programs and amounts received by ACORN in recent years:
2003
Housing Counseling Assistance $1,168,388
Community Development Block Grants $388,273
Home Investment Partnership $8,000
Self-Help Homeownership Opportunity $204,082
Fair Housing Initiatives Program $85,000
Total $1,853,743
2004
Housing Counseling Assistance $2,209,009
Community Development Block Grants $221,007
Home Investment Partnership Program $21,092
Self-Help Homeownership Opportunity $127,183
Fair Housing Initiatives Program $105,000
Total $2,683,291
2005
Housing Counseling Assistance $2,605,558
Community Development Block Grants $367,560
Self-Help Homeownership Opportunity $153,082
Fair Housing Initiatives Program $140,917
Total $3,267,117
2006
Housing Counseling Assistance $1,955,074
Self-Help Homeownership Opportunity $59,541
Rural Housing and Economic Development $47,619
Fair Housing Initiatives Program $150,000
Community Development Block Grants $238,809
Total $2,451,043
2007
Housing Counseling Assistance $1,813,011
Self-Help Homeownership Opportunity $46,608
Rural Housing and Economic Development $30,504
Fair Housing Initiatives Program $60,000
Community Development Block Grants $372,950
Total $2,323,073
My colleague, Tad DeHaven, has discussed why these HUD programs that funded ACORN ought to be abolished completely.
Subsidy information is also available from IRS Form 990, which is filed by all non-profit groups and compiled at Guidestar and other websites. I am not an expert on this data, but Velma Anne Ruth of ABS Community Research has done a detailed analysis, which she kindly sent to me. She finds that federal funding for ACORN was about $1.7 million in 2008 and about $2.2 million in 2009.
Finally, a user-friendly website to research recipients of federal grants and contracts is www.usaspending.gov.
ACORN’s share of overall federal subsidies is tiny, but as thousands of similar organizations have become hooked on 1,800 different federal subsidy programs, a powerful lobbying force has been created that propels the $3.6 trillion spending juggernaut. ACORN’s own website touts its lobbying success in helping to pass various big government programs. So cutting off ACORN is a start, but just a small start at the daunting task of cutting back the giant federal spending empire.
Bob McDonnell: The Modern Republican
This is from the Reagan administration’s deregulatory 1981 energy plan: “All Americans are involved in making energy policy. When individual choices are made with a maximum of personal understanding and a minimum of government restraints, the result is the most appropriate energy policy.”
Many modern Republicans claim devotion to Ronald Reagan’s ideas, but they often seem to forget about the “minimum of government” thing. The following points are from Republican Virginia gubernatorial candidate Bob McDonnell’s “More Energy, More Jobs” plan:
- “McDonnell was the chief sponsor of legislation creating the Virginia Hydrogen Energy Plan.”
- “McDonnell also supported grant programs for solar photovoltaic manufacturing, tax exemptions for solar energy and recycling property, and tax credits for solar energy equipment.”
- “In order to protect Virginia’s citizens from the skyrocketing wholesale prices of electricity seen in other states, McDonnell brought together all the necessary stake holders to re-regulate electricity in Virginia.”
- “Currently, Virginia is the second largest importer of electricity behind California. This is unacceptable.”
- “Bob McDonnell will establish Virginia as a Green Jobs Zone to incentivize companies to create quality green jobs. Qualified businesses would be eligible to receive an income tax credit equal to $500 per position created per year for the first five years.”
- “The Virginia Alternative Fuels Revolving Fund was established to assist local governments that convert to alternative fuel systems . . . Bob McDonnell will expand the purpose of this fund to include infrastructure such as refueling stations, provide seed money and aggressively pursue additional grants.”
- “Bob McDonnell will make Southwest and Southside Virginia the nation’s hub for traditional and alternative energy research and development…To assist with the attraction, building and operation of major energy facilities in Southside and Southwest Virginia, we will also support the establishment of the Center for Energy.”
- “To help Virginia universities gain access to federal stimulus money, as Governor, Bob McDonnell will establish the Virginia Universities Clean Energy Development and Economic Stimulus Foundation.”
- “As Governor, Bob McDonnell will leverage stimulus funding to incentivize individuals and businesses to conduct energy audits and encourage public private partnerships between small businesses and government.”
It’s true that McDonnell’s plan has some free market elements, and also that Ronald Reagan supported some wasteful energy boondoggles. However, the degree to which the modern Republican wants to micromanage and manipulate the energy industry is remarkable. McDonnell is almost setting out a Soviet five-year plan for a substantial part of the Virginia economy. For goodness sakes, he wants to treat Virginia like a separate country and try to fix the supposed problem that it is “importing” too much energy from other states!
It’s not just energy. Look at the top-down central planning ideas that McDonnell has for “creating jobs”:
Filed under: Energy and Environment; General; Government and Politics
More Evidence on America’s Socialism
KPMG has released its annual survey of personal income tax rates around the world. The survey covers 86 countries, including all the high-income nations and many middle- and lower-income nations, such as Brazil, China, and India.
The chart shows the top personal income tax rates in 2009 for national governments, per the KPMG study. The current top U.S. rate is 35 percent, which is substantially above the 86-country average of 28.9 percent. The Obama administration plans to let the U.S. rate jump to 39.6 percent in 2011, which would be almost 11 points higher than the international average.
Worse still, the United States has state income taxes with rates up to 10 percent that are piled on top of the federal tax. Some of the nations in the survey (e.g. Canada) also have subnational income taxes, but many, or most, of them do not.
Finally, note that supporters of government health care expansion have been eyeing further increases in the top U.S. tax rate above 40 percent. Alas, we need more of the Global Tax Revolution to sweep across our shores.
Filed under: International Economics and Development; Tax and Budget Policy
‘No Child Left a Dime’
That’s my favorite placard from the Washington tea party protests on Saturday. No Child Left a Dime underlines perhaps the central concern of the protesters — the ongoing massive fiscal irresponsibility in Washington by both parties.
We’ve got deficits of more more than $1 trillion for years to come. Federal debt will approach World War Two levels within a decade. Even so, the Democrats are trying to ram through a $1 trillion health care expansion, and the head of the Republican National Committee, Michael Steele, is defending against any cuts to Medicare, the program that is the single biggest threat to taxpayers. People are marching not just because Obama and the Democrats are scaring their pants off, but because most Republicans in positions of power are spendthrifts as well.
The chart illustrates that no child will be left a dime because the government will have it all. This is the CBO’s “alternative fiscal scenario,” which essentially means the business-as-usual scenario if Congress doesn’t cut anything in coming years.
Note that the most rapidly growing box, the white box, is the program that Michael Steele doesn’t want to touch. The program is expected to grow by 6.3 percent of GDP by 2050. In today’s money, 6.3 percent of GDP is about $900 billion a year in added spending. So it’s like Steele doesn’t see anything wrong with tomorrow’s young families forking over an additional $900 billion a year in taxes on this one program, or about $7,700 a year for every American household.
It’s worse than that. The biggest box on the chart by 2050 is interest on the government debt, and by far the biggest contributor to the growth in interest is Medicare. So including interest, Michael Steele’s (ridiculous) Medicare position is sort of like supporting a more than $10,000 tax hike on every young family for this one program.
Come on Republicans, you can do better than that. How about starting simply by proposing some of CBO’s modest and commonsense Medicare reforms like raising deductibles?
(By the way, interest costs rise in coming years because of an excess of spending, not a shortage of revenues. Under this CBO scenario, all current tax cuts are extended, and yet federal revenues still rise as a share of GDP over time above the historical norm of recent decades).
Filed under: Health, Welfare & Entitlements; Tax and Budget Policy
Congressional Conflict of Interest
It looks like farm subsidy reform is unlikely for another few years. Senator Blanche Lincoln has been selected the new head of the Senate Agriculture Committee. Dow Jones notes: “Lincoln is a two-term moderate Democrat who described herself Wednesday as a ‘farmer’s daughter.’”
Lincoln has been “a tireless advocate for the Arkansas rice industry” and a “champion for agriculture.” You can see what 20 or so other agriculture lobby groups say about Lincoln here. These are very laudatory remarks, but what about the taxpayers? What do taxpayers think about her support for the $20 billion or so in annual giveaways to farmers?
I’m guessing that Lincoln will put the interests of subsidy-receiving farmers in her state ahead of the interests of the nation’s taxpayers, given that Arkansas ranks seventh out of the 50 states in terms of farm subsidies received yet has a small population.
This sort of pro-spending bias on committees is common across Congress of course. I’ve argued that one step toward getting the House and Senate to make to more rational and frugal trade-offs on spending would be mandatory random committee assignments every two years. It’s absurd that generally the only people overseeing farm programs are people who are in the bag for farmers. It’s an obvious conflict of interest.
It would be much better if we had one of the senators from, say, Rhode Island chairing the Agriculture Committee, because that state receives less farm subsidies than any other. A Rhode Island senator would be more likely to dispassionately balance the trade-offs of the $20 billion or so of pain imposed by taxes to support farm subsidies with the benefits of farm subsidies (if any).
Filed under: Government and Politics; Trade and Immigration
‘Tax Cuts’ and Welfare Spending
A story in the Washington Post today is headlined: “Obama Would Keep $85 Billion in Tax Breaks for Working Poor.”
The “tax breaks” in question are expansions in the earned income tax credit and the child tax credit. The Post story repeatedly calls the expansions “tax breaks” and “tax cuts.” The budget expert quoted in the story calls them “tax cuts,” and so does a House staffer and a spokesperson for the president.
But these are not tax cuts. They are expansions in the refundability of provisions in the tax code. That means that households that pay no federal income tax will receive larger welfare checks from the government under these Obama proposals.
Obama has proposed a slew of “tax cuts” that are partly welfare payments. The chart below shows the share of the 2010-2019 dollar values of these proposals that are actually increased federal spending, and not reductions in taxes. (Calculated from OMB’s May summary tables).
The Post reporter and the budget analyst quoted in the story are both fiscal experts, and they know that these “tax cuts” are not really tax cuts. But there is a growing problem in fiscal discussions that words are getting flipped upside down to mean the opposite of what a layman would understand them to mean. A classic example is how the dollar value of true tax cuts is nearly always referred to in news articles as a “cost” rather than a “saving.”
Steny Hoyer’s use of the phrase “paid for” in the health debate is another example of how Washington-speak is confusing the heck out of people.
Filed under: Health, Welfare & Entitlements; Tax and Budget Policy
Britain’s Brown Bounces Betting Businesses
A further chapter in Britain’s economic suicide comes from Tax Notes International today (subscription only):
In a move apparently aimed at lowering their tax bills, major U.K. sports bookmakers William Hill and Ladbrokes plan to relocate their sports betting operations to Gibraltar, according to media reports.
The move by William Hill was announced on August 4 and was subsequently followed by Ladbrokes’ announcement on August 6. The moves are projected to cost the U.K. Treasury millions of pounds in tax revenue, according to an August 6 report on www.guardian.co.uk.
The departure of these sports betting firms, particularly if other sports bookmakers follow, could put the U.K.’s entire online gambling market (the largest legal betting market in the world) beyond the reach of either the Gambling Commission or the Treasury, according to media reports.
Ladbrokes CEO Christopher Bell cited “intense competitive pressure” as the main spur pushing his company offshore. “Our award winning sportsbook Ladbrokes.com is the biggest in the U.K. market but faces aggressive competition from offshore operators who hold a very significant cost advantage by operating from low tax jurisdictions. Operating from the U.K. has become unsustainable and we will relocate by the year end,” he was quoted as saying in an August 6 statement on the Ladbrokes Web site.”
The 15 percent tax on online gambling (the industry had lobbied for a 2 percent or 3 percent tax), one of Gordon Brown’s last acts as chancellor of the Exchequer, has been generally seen as an embarrassment for London, which had sought to position the U.K. regulatory approach as world leading. Instead of applying for licenses with the Gambling Commission as the laws’ drafters had hoped, members of the online gambling industry have boycotted the U.K. and headed offshore.
“The U.K. has effectively turned its back on the industry. It will now be almost impossible for a U.K.-based operator to compete with offshore business,” John Coates, chair of the Remote Gambling Association, said in a March 2007 statement. Sports betting became the last gambling subindustry to remain onshore.
Currently, the total tax faced by U.K.-based sports bookmakers includes the 15 percent profits tax, a 15 percent VAT, corporate tax, and a special 10 percent tax for horse racing betting profits. Tax rates in offshore locations such as Gibraltar, Malta, or the Isle of Man are only about 1 percent to 2 percent, according to the statement on the Ladbrokes Web site, and there is no special horse racing profits tax.”
Wall Street, Big Oil, and Federal Workers
What do workers in finance, energy, and the federal government have in common? Very generous compensation packages, according to data from the Bureau of Economic Analysis.
When I posted federal compensation data last week, I received a flood of comments that disputed my contention that federal workers are overpaid. A common retort was that “federal workers are not burger flippers.” That’s true, but workers in the computer systems design, computer manufacturing, and chemicals industries are not burger flippers either, yet those folks also earn less than federal workers, on average.
The Bureau of Economic Analysis presents compensation data for 72 industries that span the U.S. economy (Table 6.2D). Figure 1 shows the 20 industries with the highest levels of average compensation, including wages and benefits. It also shows the average for all U.S. private industries and the average for the industry with the lowest compensation, which, indeed, includes burger flipping. (I’ve simplified the names of the industries in some cases).
Federal civilian workers have the seventh highest average compensation of 72 industries. Compensation in the federal civilian workforce is topped only by compensation in three finance-related and three energy-related industries.
Should federal compensation be so high? We are always told that the 1.9 million federal civilian workers are “public servants,” implying that they are selflessly sacrificing for the good of the nation. I’m sure that most federal workers are dedicated employees, but looking at these compensation levels, I don’t see much sacrificing going on.
It is true that there are some elite agencies in the government that need to have high compensation levels. But the bulk of the federal workforce is in sprawling bureaucracies such as the U.S. Department of Agriculture, which has a huge army of about 100,000 workers. The main job of USDA workers is to administer farm aid, food stamps, and other subsidy programs. That sort of paper-pushing work is not rocket science.
The other point I made last week is that the BEA data makes clear that federal compensation has skyrocketed this decade. Figure 2 provides more support for that claim.
Federal civilian workers had the fifth highest average compensation increase among 72 industries between 2000 and 2008. Average federal civilian compensation increased 57 percent, which compared to the overall average increase in the private sector of 31 percent.
Let’s slow this freight train down. Federal pay ought to be frozen for a period of years, at least until the economy recovers and private sector pay starts catching up.
Filed under: Government and Politics; Tax and Budget Policy
British Economic Suicide
A Bloomberg story on one cause of the ongoing British economic disaster under Prime Minister Gordon Brown:
Andrew Wesbecher moved to London from New York in 2006 to sell software to banks and hedge funds. This month he joined the exodus of American expatriates fleeing high taxes and the city’s shrinking financial industry . . . Americans are heading home as Britain plans a 50 percent tax rate for those who earn more than 150,000 pounds ($248,000) a year and employers cut benefits for workers living abroad, reducing the allure of London. That comes a year after the U.K. said foreigners who have lived in the country for more than seven years must pay 30,000 pounds annually or give up the special status that shields overseas income from British taxes.
Since the 1980s, London has boomed as an international city open to the world’s entrepreneurs and their wealth, and perhaps home to more billionaires than any other city. The British economy as a whole has done quite well, pulled ahead by London and driven by a new free-market spirit in the wake of Margaret Thatcher’s privatization, deregulation, and tax cuts. Thatcher rightly argued that her cuts to income tax rates “provided a huge boost to incentives, particularly for those talented, internationally mobile people so essential to economic success.” High tax rates at the top end were a “symbol of socialism” that she wanted to scrap.
Brown is killing the free-market goose that laid the golden eggs of Britain’s success. I really don’t understand the vision of such politicians — don’t they know what they are doing? I want people to be successful. I want entrepreneurs to create wealth. I love growing, vibrant cities. Why do some people want to destroy all that?
Filed under: International Economics and Development; Tax and Budget Policy
Federal Pay: Response to the Critics
My post yesterday on federal worker pay generated a large and aggressive response from federal workers, both in my inbox and on websites such as Fedsmith.com. (See also Federal Times and Govexec). Here are four points raised in criticism:
First, people accuse me of producing distorted data somehow. Actually, it’s essentially just raw Bureau of Economic Analysis data, but the data is usually overlooked by the media because I don’t think the BEA puts out a press release on it. Anyway, the average wage data is from BEA Table 6.6D. The average compensation data is simply total compensation (Table 6.2D) divided by the number of workers (Table 6.5D).
Second, people argue that reporting overall averages for wages and compensation is somehow illegitimate. People email me comments like “my federal salary is only $50,000, yet you claim that federal workers make $79,000.” All I can say to folks like this is that there must be a federal worker out there making $108,000 who balances you off.
Third, people argue that a better analysis would be to compare similar jobs in the private and public sectors, rather than looking at overall averages. I agree that that would be very useful. Unfortunately, the BEA data is not broken down that way. At the same time, the BEA data provides the most comprehensive accounting for the value of employee benefits of any data source. Benefits are a very important part of federal compensation, and so that’s why I look to the BEA data.
Fourth, many people argue that the federal government has an elite workforce with many highly educated people. Certainly, that’s an important factor to consider. However, that is the reason why I focused on the pay trend over the last eight years. The federal worker compensation advantage rose from 66 percent in 2000 to 100 percent in 2008. Has the composition of the federal workforce really changed that much in just eight years to justify such a big relative gain? I doubt it.
A final consideration is to look at a “market test” of the adequacy of compensation in the public sector–the quit rate. The voluntary quit rate in the federal government is just one-third or less the quit rate in the private sector (Table 16 near the bottom here).
That is strongly suggestive of ”golden handcuffs” in federal employment. While many federal workers probably grumble about their jobs (as many private sector workers do), they know that the overall package of wages, benefits, and extreme job security (Table 18 here) is very hard to match in the competitive private market, and so they stay put.
Filed under: Government and Politics; Tax and Budget Policy
Federal Pay Continues Rapid Ascent
The Bureau of Economic Analysis has released its annual data on compensation levels by industry (Tables 6.2D, 6.3D, and 6.6D here). The data show that the pay advantage enjoyed by federal civilian workers over private-sector workers continues to expand.
The George W. Bush years were very lucrative for federal workers. In 2000, the average compensation (wages and benefits) of federal workers was 66 percent higher than the average compensation in the U.S. private sector. The new data show that average federal compensation is now more than double the average in the private sector.
Figure 1 looks at average wages. In 2008, the average wage for 1.9 million federal civilian workers was $79,197, which compared to an average $50,028 for the nation’s 108 million private sector workers (measured in full-time equivalents). The figure shows that the federal pay advantage (the gap between the lines) is steadily increasing.
Figure 2 shows that the federal advantage is even more pronounced when worker benefits are included. In 2008, federal worker compensation averaged a remarkable $119,982, which was more than double the private sector average of $59,909.
What is going on here? Members of Congress who have large numbers of federal workers in their districts relentlessly push for expanding federal worker compensation. Also, the Bush administration had little interest in fiscal restraint, and it usually got rolled by the federal unions. The result has been an increasingly overpaid elite of government workers, who are insulated from the economic reality of recessions and from the tough competitive climate of the private sector.
It’s time to put a stop to this. Federal wages should be frozen for a period of years, at least until the private-sector economy has recovered and average workers start seeing some wage gains of their own. At the same time, gold-plated federal benefit packages should be scaled back as unaffordable given today’s massive budget deficits. There are many qualitative benefits of government work—such as extremely high job security—so taxpayers should not have to pay for such lavish government pay packages.
Update: I respond to some criticisms of this post here.
Update 2: Compensation data for federal workers vs. other industries here.
Update 3: In September, the government revised the data for private sector workers. On 9/30/09, Figure 1 and the related text were updated to reflect this change.
Filed under: Government and Politics; Tax and Budget Policy
Steele and the Left-Wing Republicans
One of the most disturbing things about the current health care debate is that some Republicans are positioning themselves as defenders of Big Government Medicare and against efforts to trim the program’s costs.
Yet the taxpayer costs of Medicare are expected to more than double over the next decade (from $425 billion in 2009 to $871 billion in 2019), and the program will consume an increasing share of the nation’s economy for decades to come unless there are serious cuts and reforms. Even the Obama administration talks about “bending the cost curve” to slow the program’s growth.
Yet Republican National Committee chairman, Michael Steele, takes to the Washington Post today to defend Medicare against any cuts, while at the same time criticizing the Democrats as “left-wing ideologues:”
- “Under the Democrats’ plan, senior citizens will pay a steeper price and will have their treatment options reduced or rationed.”
- “Republicans want reform that should first, do no harm, especially to our seniors.”
- “We also believe that any health-care reform should be fully paid for, but not funded on the backs of our nation’s senior citizens.”
- “First, we need to protect Medicare and not cut it in the name of ‘health-insurance reform.’”
- “Reversing course and joining Republicans in support of health care for our nation’s senior citizens is a good place to start.”
Steele uses the mushy statist phrasing “our seniors” repeatedly, as if the government owns this group of people, and that they should have no responsibility for their own lives.
Fiscal conservatives, who have come out in droves to tea party protests and health care meetings this year, are angry at both parties for the government’s massive spending and debt binge in recent years. Mr. Steele has now informed these folks loud and clear that the Republican Party is not interested in restraining government; it is not interested in cutting the program that creates the single biggest threat to taxpayers in coming years. For apparently crass political reasons, Steele defends “our seniors,” but at the expense of massive tax hikes on “our children” if entitlement programs are not cut.
Filed under: Government and Politics; Health, Welfare & Entitlements
Cash for Clunkers: Dumbest Program Ever?
As the Cash for Clunkers program begins to wind down, I nominate it as the dumbest government program ever. Here is what the program will have accomplished:
- A few billion dollars worth of wealth was destroyed. About 750,000 cars, many of which could have provided consumer value for many years, were thrown in the trash. Suppose each clunker was worth $3,000 at a guess, that would mean that the government destroyed $2.25 billion of value.
- Low-income families, who tend to buy used cars, were harmed because the clunkers program will push up used car prices.
- Taxpayers were ripped off $3 billion. The government took my money to give to people who will buy new cars that are much nicer than mine!
- The federal bureaucracy has added 1,100 people to handle all the clunker administration. Again, taxpayers are the losers.
- The environment was not helped. See here and here.
- The auto industry received a short-term “sugar high” at the expense of lower future sales when the program is over. The program apparently boosted sales by about 750,000 cars this year, but that probably means that sales over the next few years will be about 750,000 lower. The program probably further damaged the longer-term prospects of auto dealers and automakers by diverting their attention from market fundamentals in the scramble for federal cash.
Farm subsidies are unjust. Trade restrictions are counter-productive. Energy regulations have done great damage. Housing policies helped cause the financial crisis. But for pure dumbness, Cash for Clunkers takes the cake.
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