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Another Log for the Government Spending Multiplier Fire
At the center of the debate over efforts by policymakers to “stimulate” the economy with government spending is the issue of fiscal multipliers. Some economists argue that government spending can be a free lunch: an additional dollar of government spending increases GDP by more than one dollar. Other economists say that government spending is not so free: an additional dollar of government spending increases GDP by less than one dollar or even reduces it.
My non-empirically based view is that the mainstream media tends to treat the free lunch position as gospel. Why that appears to be the case I’ll leave to others to speculate, but it is decidedly irritating. Back in 2010, my colleague Alan Reynolds noted that a survey conducted by an economist at the Federal Reserve Bank of San Francisco counted several studies that concluded that the multiplier effect of government spending is less than one.
We can now add to the list another study that found a multiplier of less than one.
From a National Bureau of Economic Research working paper by economist Valerie Ramey:
For the most part, it appears that a rise in government spending does not stimulate private spending; most estimates suggest that it significantly lowers private spending. These results imply that the government spending multiplier is below unity. Adjusting the implied multiplier for increases in tax rates has only a small effect. The results imply a multiplier on total GDP of around 0.5.
Note: For readers who are interested in real world examples of how government spending hinders economic growth, check out DownsizingGovernment.org.
Earmarks are a Symptom of the Problem
A Washington Post investigation identified dozens of examples of federal policymakers directing federal dollars to projects that benefited their property or an immediate family member. Members of Congress have been enriching themselves at taxpayer expense? In other news, the sun rose this morning.
According to the Post, “Under the ethics rules Congress has written for itself, this is both legal and undisclosed”:
By design, ethics rules governing Congress are intended to preserve the freedom of members to direct federal spending in their districts, a process known as earmarking. Such spending has long been cloaked in secrecy and only in recent years has been subjected to more transparency. Although Congress has imposed numerous conflict-of-interest rules on federal agencies and private businesses, the rules it has set for itself are far more permissive.
Lawmakers are required to certify that they do not have a financial stake in the actions they take. In the cases The Post examined, not one lawmaker mentioned that he or she owned property that was near the earmarked project or had a relative who was employed by the company or institution that received the earmark. The reason: Nothing in congressional rules requires them to do so, and the rules do not address proximity.
With the fox guarding the henhouse, the most one can hope to accomplish is to limit the carnage. Many pundits, politicians, and policy wonks argue that a permanent ban on earmarks would be an effective limit. Unfortunately, that’s just wishful thinking as earmarks are merely a symptom of the real problem: Congress can spend other peoples’ money on virtually anything it wants.
Take the example of Rep. Candace Miller (R-MI):
In Harrison Township, Mich., Rep. Candice S. Miller’s home is on the banks of the Clinton River, about 900 feet downstream of the Bridgeview Bridge. The Republican lawmaker said when she learned local officials were going to replace the aging bridge, she decided to make sure the new one had a bike lane.
“I told the road commission, ‘I am going to try to get an earmark for the bike path,’” Miller said, recalling that she said, “If we don’t put a bike path on there while you guys are reconstructing the bridge, it will never happen.”
A member of the House Transportation Committee, Miller in 2006 was able to secure a $486,000 earmark that helped add a 14-foot-wide bike lane to the new bridge. That lane is a critical link in the many miles of bike paths that Miller has championed over the years. When the bridge had its grand reopening in 2009, Miller walked over from her home.
“People earmark for all kinds of things,” she said. “I’m pretty proud of this; I think I did what my people wanted. Should I have told them, ‘We can never have this bike path complete because I happen to live by one section of it’? They would have thrown me out of office.”
Forget how the federal money made it to Harrison Township, Michigan. As I’ve discussed before, the more important concern is that the federal government is funding countless activities that are not properly its domain:
There just isn’t much difference between the activities funded via earmarking and the activities funded by standard bureaucratic processes. The means are different, but the ends are typically the same: federal taxpayers paying for parochial benefits that are properly the domain of state and local governments, or preferably, the private sector. As a federal taxpayer, I’m no better off if the U.S. Dept. of Transportation decides to fund a bridge in Alaska or if Alaska’s congressional delegation instructs the DOT to fund the bridge.
As a taxpayer, it disgusts me that Rep. Miller steered federal dollars to a project in her district that she personally benefited from. But would I be any better off had the money for a bike path in Harrison Township, Michigan come from a grant awarded by the Department of Transportation?
If Harrison Township wanted a bike path, then it should have been paid for with taxes collected by the appropriate unit of local government. Better yet, a private group could have raised the funds. Either way, I don’t see how it’s possible to argue that the U.S. Constitution gives Congress the authority to spend taxpayer money on such activities. Invoking the General Welfare Clause doesn’t pass the laugh test as the bike path obviously doesn’t benefit the rest of the country. The Commerce Clause? Please.
For more on why the federal government should stop subsidizing activities that are properly the domain of the state and local government, see this Cato essay on fiscal federalism.
Biennial Budgeting: Baloney Budget Reform
I don’t recall ever agreeing with the left-liberal Center on Budget and Policy Priorities (CBPP), but their new paper on the drawbacks of the federal government switching to biennial budgeting is a good read. Congressional Republicans, including House Budget Committee chairman Paul Ryan (R-WI) and Senate Budget Committee ranking member Jeff Sessions (R-AL), are the chief proponents of switching to a biennial budget cycle. By providing (qualified) support to the CBPP paper, I’m hoping to demonstrate to would-be GOP naysayers that criticism of biennial budgeting isn’t confined to one area of the ideological spectrum.
I don’t agree with everything in the paper and I don’t share some of the authors’ concerns, but here are three solid points that the paper makes:
- In 1940, 44 states practiced biennial budgeting. Currently, only nineteen do. In addition, larger states typically have an annual budget cycle. The authors correctly ask, “if large state governments find that biennial budgeting is not the best approach given the responsibilities they shoulder, is it likely to prove appropriate for an entity with the far more extensive domestic and international responsibilities of the U.S. government?”
- The authors call the claims made by proponents that biennial budgeting will free up more time for oversight “overstated.” Authorizing committees can conduct oversight anytime they want. The appropriation committees conduct oversight when they review agency budget requests each year. What’s the benefit of having oversight conducted by the appropriations committees every two years? (For the record, I think the value of congressional oversight is overstated for public choice reasons, but I’ll play along for today.)
- The authors explain what I consider to be the fatal flaw with biennial budgeting:
The desire of many lawmakers to rein in such supplemental appropriations and reassert meaningful control over all annually appropriated funds — and the practice the Obama Administration has followed of including war funding within the regular defense appropriations bill, which has improved budget transparency — would become much harder to fulfill if biennial budgeting were implemented. It is not possible for Congress effectively to plan ahead for unexpected needs in the second year of a biennium. Large supplemental appropriations to meet such needs outside of the two-year budget plan would almost certainly become a regular part of the budget process and could further erode budget controls and accountability.
(Note: A recent paper from Cato adjunct scholar Veronique de Rugy explains that supplemental appropriations are already a problem.)
As a former budget official in a state that uses biennial budgeting, I just don’t understand what congressional Republicans think they’re going to accomplish. The cynic in me thinks that at least part of the support stems from the unwillingness of most Republicans to get specific on what they’d eliminate from the federal budget. Like the Balanced Budget Amendment, I think a lot of Republicans are simply using biennial budgeting as political cover.
State Dependency on the Federal Government
The president’s fiscal 2013 budget proposal is scheduled to be released on February 13th. State officials are predictably sounding the alarm on the coming “deep cuts” to federal subsidies now that stimulus funds are running out and Washington is being forced to confront its mounting red ink.
State officials have become addicted to federal subsidies because they allow them to spend money taken from taxpayers across the country instead of having to ask their voters to pony up the funds. As the following charts shows, total state spending continued to increase during the economic downturn because the federal government picked up the slack. Note that the federal share of total state spending went from 25.7 percent in 2001 to 34.1 percent in 2011.
See this Cato essay on federal subsidies to the states for more on why it is critical to reverse this trend.
U.S. Postal Service Fares Worse in Recession than Foreign Posts
A new paper from postal expert Michael Schuyler compares the financial performance of the U.S. Postal Service to foreign postal service providers. Not surprisingly, the USPS, which has lost over $25 billion since 2006 and ranks near the bottom of the Postal Index of Freedom, doesn’t fare too well.
From the paper:
[Universal Postal Union] data indicate that, in each year, the majority of posts in high-income jurisdictions were profitable. Declining mail demand was stressful, though: the share of posts reporting losses increased from less than one in ten in 2007 to more than one in three in 2010. Nevertheless, few posts lost money consistently: under 20% over the period 2008-2010 and under 10% over the period 2007-2008, which suggests most foreign posts reacted quickly and effectively to financial setbacks. The good news is that posts can adjust to change and remain financially viable. Unfortunately, USPS is among the posts with consistent losses. Further, UPU data show that, in each year, more than half the reporting posts in medium-income jurisdictions were profitable. Few spilled red ink year after year.
Schuyler says that he will explore the reasons for the USPS’s comparatively poor performance in a future paper, but notes that “A key finding will be that Congressional restrictions and pressure often deny the Postal Service the operational flexibility needed to manage its costs properly.” In a Cato essay, I discuss the problems with Congress’s micromanagement of the U.S. Postal Service and conclude that it should be placed on the path to privatization.
Another postal expert, Alan Robinson, notes Schuyler’s piece and offers additional commentary on the need for policymakers to figure out what to do with the flailing postal service. Should the USPS go back to being subsidized by taxpayers? Or should the USPS remain a part of the federal government at all? Robinson concludes that “it is time for postal service stakeholders, and in particular its labor unions, to develop an acceptable path toward privatization.”
Obama Proposes New Department of Corporate Welfare
Contrary to what various news outlets are reporting, President Obama is NOT proposing to cut government. The administration is proposing to take four independent federal agencies that specialize in corporate welfare – along with the Office of the U.S. Trade Representative – and combine them with corporate welfare programs at the Department of Commerce to form what I would argue should be called the Department of Corporate Welfare.
According to reports, this rearranging of the deck chairs would save $300 million a year. That’s peanuts. Worse, those alleged savings will be of no consequence to taxpayers as there is nothing to suggest that the president intends to cut overall spending for the agencies comprising the new bureaucracy. That portends bigger government, not smaller. The president is trying to sell the American taxpayer a false bill of goods.
The president’s proposal is also an attempt to counter the perception – an accurate one – that the administration’s policies are detrimental to commerce. But corporate welfare is detrimental to commerce because the market distortions it creates hinder economic output. Making it easier for select businesses to help themselves to taxpayer-financed subsidies would only perpetuate the same sort of crony capitalist schemes that gave us Solyndra and the Chevy Volt.
Of course, no transparent attempt to appear “business friendly” would be complete without a bone toss to the Small Business Administration. The “bone” this time is the president’s intention to elevate the head of the SBA to the Cabinet. As I discuss in a Cato essay on the SBA, rather than helping small businesses compete against big businesses, the SBA’s loan guarantees mainly help a tiny share of small businesses compete against other small businesses. In reality, the biggest beneficiary of the SBA is the banks, which reap the profits from the loans guaranteed by the agency.
Finally, Republican policymakers talk a good game about cutting government, but they often hide behind calls for making the federal government “more efficient.” Now that the president has seized a political opportunity to sing from the GOP’s hymnal, it’ll be interesting – if not entertaining – to see how Republican policymakers respond. To avoid embarrassment, I recommend offering specific spending cuts.
Pennsylvania Moves to Starve Poor People
That’s the message I came away with after reading an online article from a Philadelphia Inquirer reporter about a decision by the state of Pennsylvania to limit eligibility for food stamps. The article is a perfect example of the difficulty advocates for limited government face in communicating their ideas through the mainstream press.
At issue is the PA Department of Public Welfare’s decision to eliminate eligibility for food stamps for people under the age of 60 who have more than $2,000 in assets (the value of one’s house, retirement benefits, and car would be excluded). The DPW estimates that only “2 percent of the 1.8 million Pennsylvanians receiving food stamps would be affected by the asset test.” Indeed, the DPW’s website notes that “Because of changes to SNAP, most Pennsylvania households are not subject to a net income limit, nor are they subject to any resource or asset limits.”
(SNAP is the acronym for the federal Supplemental Nutrition Assistance Program, which was known as the Food Stamp program until 2008 when Congress changed its name to sound more palatable. The program is run jointly by the U.S. Department of Agriculture and state governments, but federal taxpayers pay for the direct benefits.)
One of the “changes” that the DPW refers to is categorical eligibility, which basically means that Pennsylvania households already receiving benefits from other welfare programs, including cash welfare and Supplemental Security Income, automatically qualify for food stamps. In recent years, both the state of Pennsylvania and the federal government have made it easier to qualify for food stamps benefits.
Unfortunately, the Inquirer reporter either wasn’t aware of these details or didn’t deem them important enough for inclusion. Instead, he quotes ten—let me repeat that, ten—critics of the DPW’s decision. The critics include a “national hunger expert,” the legal director of a “leading anti-hunger group,” the executive director of the Greater Philadelphia Coalition Against Hunger, the executive director of the “liberal Pennsylvania Budget and Policy Center,” and an older woman who says that she’ll “have to give up paying for my health insurance.”
It took me all of two minutes to get a quote from Nathan Benefield, the director of policy analysis at Pennsylvania’s pro-liberty Commonwealth Foundation:
Unfortunately for taxpayers, politicians in Harrisburg and Washington have for the past few years considered it a “success” to have more families on welfare. Pennsylvania welfare eligibility and spending—including for food stamps—has exploded, threatening to crowd out everything else in the state budget. Means testing for assets is a common-sense reform to ensure those who truly need aid get it.
There, was that so hard?
Of course, journalists who are interested in getting the pro-liberty take on welfare reform are welcome to contact my colleagues and me at the Cato Institute. Honestly, we don’t want people to starve in order to save a buck—we just believe that the federal government is an improper and less effective means for assisting those who are truly in need. Pressed for time? Here are Cato essays on food subsidies, welfare, and federal subsidies to state and local government.
A Guide to the Presidential Candidates’ Proposals to Cut Spending
Over at Downsizing the Federal Government, Chris Edwards and I have regularly complained that most policymakers have been insufficiently specific when it comes to identifying spending cuts. With the Republican primaries about to get underway, it’s a good time to see what the current crop of presidential aspirants has to offer.
There are multiple ways to skin this cat, but I decided to put together a comparison table based solely on the content found on each candidate’s campaign website. I did not consider past statements or votes, the televised debates, or outside sources (unless linked to by a campaign’s website). The idea is that statements on each candidate’s website should offer the clearest indication of their intentions should they become president.
Ron Paul is the only candidate who actually produced a proposed federal budget. Therefore, I started with his template and added additional agencies/programs cited on the websites of the other candidates. Again, the idea is to show specifically what the candidates are proposing to cut. Thus, proposed spending reforms such as a Balanced Budget Amendment or a spending cap are not included.
There is a degree of subjectivity in putting this together, but I tried to be fair and consistent. It is for informational purposes only (i.e., it should not be construed as an endorsement of any candidate(s)). Finally, it is possible that proposals were missed, but that could be a reflection of a website’s accessibility to pertinent information.
Sen. Coburn’s 2011 Wastebook
The office of Senator Tom Coburn (R-OK) has released the 2011 edition of its annual “Wastebook.” The document spotlights 100 particularly ridiculous expenditures of taxpayer money from the past year. From an entertainment standpoint, it’s pure gold. But it’s also infuriating, depressing, and a painful reminder of what happens when politicians and bureaucrats spend other people’s money.
Here are my five “favorites”:
- $10 million for remake of “Sesame Street” for Pakistan (U.S. Agency for International Development). Osama bin Big Bird?
- $350,000 for an international art exhibit in Venice, Italy (State Department). To really appreciate this one, check out the pictures on page 21.
- An additional $175,587 to the University of Kentucky to study how cocaine enhances the sex drive of Japanese quail (National Institutes of Health). My guess: American quails couldn’t be used because the females are prone to getting a headache at the most inconvenient time.
- $592,527 for a study on why chimpanzees throw feces (National Institutes of Health). Perhaps NIH can fund a study on how cocaine affects the chimps’ aim.
- $150,000 for the American Museum of Magic in Michigan (Institute of Museum & Library Services). It ought to be relocated to Washington given the city’s unrivaled ability to make money disappear.
Yes, the money involved here amounts to pocket change in comparison to the $3.7 trillion the federal government spent last year. But as Coburn asks in the introduction, “Do these initiatives match your understanding of the role of the federal government as outlined by the Enumerated Powers of the U.S. Constitution?” Worthy or not, very little of what the federal government spends money on comports with the Founders’ vision of a national government that was to be strictly limited in its scope. That the money is often poorly spent is proof that their intentions were wise.
Check out DownsizingGovernment.org for more information on many of the agencies and programs cited in the Coburn report.
Jack Link’s Presents: Messin’ With Taxpayers
If you’re a taxpayer and you like beef jerky, I have good and bad news. The good news is that Jack Link’s is expanding the production facilities at its corporate home in Minong, Wisconsin. The bad news is the expansion is being “made possible” with a $365,000 federal grant to Minong for infrastructure upgrades.
The money comes from the Department of Housing and Urban Development’s Community Development Block Grant program. Curiously, the state’s Wisconsin Economic Development Corporation doesn’t mention in the press release that the money is coming from federal taxpayers:
The Village of Minong will receive a $356,000 Community Development Block Grant for Public Facilities for Economic Development from the Wisconsin Economic Development Corporation (WEDC) to help finance utility improvements that will facilitate the expansion of Link Snacks, Inc. Link Snacks’ expansion is expected to create 70 full-time jobs over the next three years…
The Community Development Block Grant program is a versatile financing tool for general-purpose local units of government in need of funds to undertake needed infrastructure and public building projects. The program is designed to enhance the vitality of a community by undertaking public investment that contributes to its overall community and economic development.
The WEDC was created by Republican Gov. Scott Walker to replace the state’s Department of Commerce and is modeled after Gov. Mitch Daniels’ Indiana Economic Development Corporation. Like the IEDC, the WEDC dispenses corporate welfare and engages in what I derisively call “press release economics.” Given that the press release doesn’t mention that the money came from the federal government, and thus makes it look like the Walker administration is responsible for the “job creation,” I’d say that the WEDC has learned well from its cousin in Indiana.
The bottom line is that it is not a proper role of the federal government to fund local infrastructure projects for the benefit of a business. The bureaucratic inefficiency alone of laundering money through three levels of government (from federal to state to local) is reason enough to terminate the Community Development Block Grant program. Unfortunately, the CDBG program creates a win-win situation for politicians at all levels, which means that taxpayers are going to keep losing unless enough voters come to realize that robbing Peter to pay Paul’s company isn’t good economics.
See this Cato essay for more on fiscal federalism and this essay for more on the community development subsidies.
This Week in Government Failure
Over at Downsizing the Federal Government, we focused on the following issues this past week:
- Extending the extra unemployment insurance benefits would be bad for the federal budget and bad for the economy, and there is a better long-term solution for unemployment than the current UI system.
- All of the massive speculation in the housing market didn’t “just happen”—it was the result of massive government distortions in our housing and financial markets.
- The Obama administration and Gov. Mitch Daniels team up to help build a technology park for defense contractors with taxpayer dollars.
- One would think just the sheer lunacy of federal education policymaking would make it clear to all that Washington should get out of education.
- The U.S. Postal Service gives Congress more time to inevitably kick the can down the road.
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USPS Gives Congress More Time to Kick Can
Last week, the U.S. Postal Service filed a plan with its regulator to close half of its mail processing facilities and reduce delivery standards in order to reduce costs. I called the move a message to Congress because “the USPS is running on financial fumes and Congress is still trying to figure out how to kick the can down the road.”
This week, the USPS said that it’s delaying the closure of mail processing facilities and post offices by a few more weeks in order to give Congress more time to come up with “comprehensive postal legislation.” According to the press release, the delay comes “in response to a request made by multiple U.S. Senators.”
That’s hardly a surprise. Here’s what I wrote last week:
The biggest obstacle standing in the way of the proposal is, of course, Congress. I would venture a guess that legislation will be introduced to stymie the plan—if it hasn’t already. After all, members of Congress have consistently fought USPS efforts to shutter post offices. Naturally, the postal employees unions aren’t happy and will make sure that policymakers know it.
According to the Washington Post, “a group of 21 senators from mostly rural states led by Bernie Sanders, an independent from Vermont, signed a letter to congressional leaders asking them to add language to legislation that would halt closings for six months.” Sen. Sanders also sponsored legislation in November that would hand the USPS a bailout and preserve the status quo. Well, Sanders calls himself a socialist so I suppose it would make sense that he’d want to do whatever it takes to preserve the government’s floundering mail business.
And in other postal news, the House passed legislation on Tuesday to name a post office.
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